Exploring South Africa’s Investment Opportunities

For nearly 45 years, Rob Scharar, President and Director of FCA Corp and President of Commonwealth Funds, has been guided by an investment approach that relies on the development of local knowledge and business experience. Through direct investment, business development and consulting opportunities within several African countries Scharar and his team have gained access to a steady stream of on-the-ground intelligence that informs Commonwealth’s Africa Fund portfolio.
As the second largest African economy based on estimated 2019 GDP, the nation of South Africa has much to offer from an investment perspective. With its vast natural resources – South Africa is the world’s largest producer of platinum, gold and chromium – mining is a key industry. South Africa has also developed robust energy, transport and financial sectors. In fact, its stock exchange is the largest in Africa and ranks in the world’s top 20 exchanges.
Despite its resources and maturing industry sectors South Africa has endured a period of declining growth over the last several years due to several challenges. For example, although it has a relatively modern infrastructure, the country is plagued by frequent electrical outages. Eskom (Electricity Commission of South Africa, one of many struggling state-owned enterprises) is South Africa’s only electricity provider, which has been hampered by aging power plants nearing the end of their useful lives, mismanagement and enormous debt. Earlier this year, new CEO Andre de Ruyter took reins of the company to attempt a turnaround.
Other challenges to South Africa’s economic outlook include its sovereign debt rating, which has been downgraded by both Fitch and Standard & Poor’s to non-investment grade. Moody’s is expected to follow suit shortly. South Africa also faces a growing shortage of skilled workers due to elevated levels of emigration to the United Kingdom, Australia, New Zealand, Canada and the United States.
Despite the challenges, there are several bright spots to watch for as South Africa seeks to build on its status as a market with a developing consumer class. In response to the ongoing challenges faced by Eskom, several South African companies are now opting to generate their own electricity. Independent power generation, led by mining companies, is gaining popularity. The challenge is also driving innovation, as some companies turn to renewable energy sources, particularly solar power. The country’s high levels of solar radiation, coupled with relatively mild temperatures, provide an emerging solar industry an opportunity for significant growth as it offers a viable alternative to Eskom.
In the wake of growing disillusion with state-owned enterprises, privatization is gaining traction to not only rescue these businesses but also decrease the tax burden on South Africa’s shrinking tax base. Privatization could lead to significant inflows of cash to South Africa as well as more competent leadership for the enterprises. South African companies continue to lead growth and economic integration across Africa. Their decades of operating experience and connections across Africa have given them a distinct advantage over international companies in terms of capitalizing on opportunities in the region.
And, while SAA (South African Airways), the national carrier has struggled for several years, the country’s tourism industry appears primed for growth. The nation’s two largest cities – Cape Town and Johannesburg – offer a mix of culture and bustling nightlife. Both cities have modern airports which support the country’s nearly 150 daily international flights. Wildlife safaris and breathtaking scenery add to the appeal of the country as a tourist destination.
Together, these factors point to significant future investment opportunities. As those opportunities develop, Commonwealth Funds will continue to monitor the potential impact for investors. To learn more about Commonwealth’s approach and its Africa Fund, visit commonwealthfunds.com or call 888.345.1898.