There was once much hope for South Africa, to the extent that it was added to the end of that infamous and meaningless acronym BRICS. But instead of being a bright, shining light to the rest of Africa, the country has fallen by the way side, mired in corruption, inaction, and chronic unemployment.
President Jacob Zuma, who was re-elected in 2014, is possibly the worst thing to happen to that country. He wears corruption as a badge of honor and is appalled, yes appalled, that he is being made to repay the millions of dollars he raided from the state coffers in order to convert his house into a palace. In my opinion, he should be impeached and thrown out of office but that isn’t going to happen any time soon. Mr. Zuma has surrounded himself with people who have made crony capitalism an art form, and this is all playing out against a background of high unemployment, a stagnant economy, and foreign investor fears. Not where I would have expected South Africa to be today. And if that wasn’t all, it appears that the government now wants to swerve even more off course by involving Zimbabwean tactics.
Recently the parliament passed an expropriation bill which the government says will correct the excesses of the past. The goal of the bill is to allow the government to forcibly purchase land from white South Africans and place it in the hands of blacks. The bill hasn’t been signed by the president yet, but I have no doubt it will be. An African National Congress (ANC) spokesman said when the bill was passed that it addressed, “the legacies of apartheid and colonialism.” If you remember, Zimbabwe did the same thing many years ago and that worked out very well. In case you can’t detect it, I am being facetious.
Now back to the real world. South Africa finds itself as the third largest economy in Africa behind Nigeria as number one and Egypt as number two, according to the IMF. In a report by accounting firm KPMG, chief economist Lullu Krugel said, “Psychologically, I do think this is a blow. We’ve always thought of ourselves as the powerhouse of Africa, and then we’re number two and now we’re pushed to number three.” Sadly, they slipped to number three not because the Egyptian economy is firing on all cylinders, but because the South African economy is heading for a recession. The latest GDP numbers show a 1.2% contraction in the first quarter of 2016.
Recently however, South Africa breathed a sigh of relief when ratings agency Standard and Poor’s reaffirmed the country’s foreign currency bond at BBB- with a negative outlook, one notch above junk bond status. Unemployment rose to 26.7% in the first quarter of 2016, up from 24% last year. In spite of all this, President Zuma continues on his path of economic destruction and nobody seems to want to stop him.
Will the Rand go the way of the Zimbabwean whatever and be worthless? Only time will tell. It’s not that there isn’t a way out of this quicksand, there is. Several economists have put forth their views, none of which have been considered. Truly depressing.
Having said all that, foreign investors can take advantage of some South African stocks, mainly in the gold mining and production industry. As I have mentioned in other articles, I believe we are on a cusp of a commodities boom, especially in gold because of the slowing of developed market economies. Gold historically has been seen as a hedge against inflation and recession, so at this point I would look not at ETFs but four particular gold mining and production stocks that have recently been on a tear. These are: AngloGold Ashanti Ltd (AU) up 134% YTD, DRDGold Ltd (DRD:SJ) also up but this time a whopping 195%, Sibanye Gold Ltd (SBGL), and finally Harmony Gold Mining Co Ltd (HMY) up an unbelievable 302%. All these companies still have tremendous growth opportunities, and depending upon how deep the global slow is will affect how high these stocks will go.
Finally, if the government decides that they need to do what is necessary to turn the economy around then I will be the first in line to applaud. Unfortunately, I am not that optimistic, because even though Standard and Poor’s decided against a downgrade, I see South Africa on the verge of crashing and burning.
Peter Kohli, CEO of emerging market specialist DMS Funds.