Miriam Mannak

February 13, 2015: Up until recently, Africa was a place best avoided. Apart from its natural resources, the continent was deemed pretty much insignificant. This notion has changed fundamentally over the past decade or two. Figures by the United Nations Conference on Trade and Development (Unctad) show that Foreign Direct Investment (FDI) inflows grew from $10 billion in 1999 to $55 billion last year.

Robert Hersov, CEO and founder of Invest Africa, has an explanation for that. “Governance and regulatory frameworks have improved over the past years. In addition, people are no longer taking money out of Africa as more and more Africans are investing in their continent,” he said during the 2015 Mining Inbada conference, which took place in Cape Town, South Africa, from February 9-11. “More and more Africans, who once left the continent, want to come back because of the opportunities. The continent is going into the right direction rapidly. Five years ago, everyone was talking about the BRICS block. Now, everyone is talking about Africa.”

Hersov wasn’t the only optimist attending the Mining Indaba, which is currently the world’s largest mining and investment conference. “Every single day, we speak to investors who want to invest in Africa. The perceptional risk has changed,” said Paolo Scaroni, Deputy Chairman of financial advisory firm Rothschild. “The risk of Africa is not as high as it used to be. There are some challenges, of course. Electricity, for instance. Over half the population in sub-Saharan Africa does not have access to electricity. Without electricity there is no development. This needs to be solved.”

Whilst mining will undoubtedly continue to foster growth across Africa, other industries are expected to gain importance in the near future. “E-Commerce will be one of game changers,” says Ugandan businessman Ashish Thakkar, founder of the Mara Group. This conglomerate comprises financial services, infrastructure, technology and real estate businesses, and has a presence in 24 African countries. “It comes down to having the right products and the right platforms.” Thakkar added that the world can also expect African technological innovations in the future.

AshishThakkar Founder Mara Group

“Everyone keeps talking about brining Silicone Valley to Africa, but the question is how we take Africa to Silicone Valley,” he said, adding that Africa is already producing innovations. One of them is M-pesa, which was developed in Kenya. The mobile currency has since made its way across the continent, providing financial inclusion to millions of people. “Africa is not catching up with the rest of the world. This is our time already!”

Tonye Cole from Nigeria, co-founder of energy conglomerate Sahara Group, is equally positive about Africa as a business destination. “It is the only continent that has something for everyone,” he said. “Anyone can do something in Africa, from an entrepreneurial point of view. This region has produced great entrepreneurs who are doing things we never thought were possible here.”

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The post Why everyone is talking about Africa appeared first on International Finance.

Miriam Mannak

November 5,2014:It hasn’t been plain sailing for South Africa. Besides slipping on the World Bank’s Economic Freedom Index and the World Economic Forum’s Competitiveness Index, the International Monetary Fund presented a rather bleak economic outlook for Africa’s second largest economy. While there are reasons to worry, analyst John Kane-Berman says the situation is not irreversible.

The year has been a tumultuous one for Africa’s southernmost nation state. Apart from being overtaken by oil producer Nigeria in terms of the size of the economy, South Africa is struggling subjected to various social and economic problems. The chronic energy issues for instance, which date back to 2008, have been far from solved and remain concerns for growth and competitive rankings.

Then there is the unemployment rate, which at 26% is the third highest in the world. Joblessness among youths in particular is problematic: South Africans between 16 and 35 account for some 70% of those without work. Other economic hurdles include frequent and often violent strikes; rigid and inflexible labour laws; overly powerful trade unions; the impact of ageing and ailing infrastructure such as the looming collapse of the water supply network; and a weakened and volatile rand.

Strangling the economy

In the meantime, the world’s largest platinum producer has slid on various international benchmarks, including the most recent Global Competitiveness Index by the World Economic Forum (WEF). South Africa’s dropped three places this year. Whilst this might not seem significant, the country’s loss on this particular index over the past decade amounts to 15 places – a 26% decline since 2004.

Analyst John Kane-Berman attributes the issues and challenges mentioned above to the manner policy is and has been made since 1994, the year of the first democratic elections. The CEO of the Institute of Race Relations (IRR), a classically liberal think-tank that aims to provide solutions to drive investment and growth, feels that South Africa “doesn’t need international reports and ratings to find out that the state is slowly strangling the economy.”

One of the things that concern him the most is the declined interest of investors. “The IRR has been involved in educating investors about South Africa’s benefits and risks for years,” he says. “In the last few weeks, one tour to South Africa was cancelled because the potential investors were no longer interested. Another local bank had to pack an investors’ meeting with its own staff because so few foreigners were interested. Even some of our own companies are seeking to reduce their exposure to South Africa.”

The tide can turn

This scenario is precarious, but not irreversible, Kane-Berman says. Turning the tide is possible, but it requires new policies based on a brand new ideology. It basically means that South Africa should steer away from wanting to be a revolutionary, interventionist state which has control over everything.

Kane-Berman: “Instead of wanting to interfere in every segment of society and the economy, the government should opt for liberal, less controlling policies. When the previous government handed over power to the present one, the IIR said the alternative to apartheid should be a free society built on the rule of law; one built on individual rights and responsibilities; free markets and enterprise – one where there is no distinction between economic and political freedom.”

This has not happened and can be considered one of the reasons why South Africa is lagging behind many other African countries in terms of economic growth. This month, the IMF’s latest World Economic Outlook update slashed the South African growth prospects for 2014 to 1.7% – down from an initial 2.3% forecast. Ghana and Cameroon, both middle-income countries, will see their economies grow by 4.5% and 5.1% respectively whilst the economy of copper producer Zambia is expected to rise by 6.5%.

Growth to fight inequality

It is South Africa’s third consecutive IMF downgrade in a year. Culprits include excessive red tape for entrepreneurs, rigid labour laws, labour instability and energy supply constraints. Kane-Berman says that little or no growth is detrimental to the country’s fight against inequality. He refers to the fact that South Africa, according to the World Bank’s Gini Index, is the most unequal society in the world.

The analyst adds that fighting inequality is futile under the current policies – namely the reduction of inequality through the redistribution of assets and under the transformational banner ‘Black Economic Empowerment’. “Talk jobs, not transformation,” Kane-Berman says. “Unemployment is the biggest cause of inequality. The only way to deal with unemployment, thus inequality, is much faster rates of economic growth. This requires higher rates of investment.”

“To get higher rates of investment, we need to secure property rights, lower the taxes, liberalised our labour laws, aim for privatisation, appoint a public sector based on merit, allow for free trade, get a professional police force as well as a more accountable parliamentary system.”

These and other proposed recommendations are incorporated in Kane-Berman’s 12-point plan, which he presented last year. The suggestions include turning economic growth into the state’s overriding priority instead of one of many as well as outlawing violent strikes and limiting red tape when it comes to setting up and running a business.

Change will happen

The plan also includes recommendations in terms of liberalising trade, decentralising government and policing, and privatising money-devouring state-owned enterprises such as South African Airlines. “Our government would rather have a failing state-owned airline than a successful privately-owned airline,” Kane-Berman says, pointing at SAA’s request to be bailed out – barely two years after it was granted £277 million in loan guarantees.

The IRR leader however, adds that he is confident that change will happen sooner or later, and that it might not come from the ruling party. “Change will come about, here as well as elsewhere – through the interplay between events and ideas,” Kane-Berman says. “Politicians can sometimes control events, but sometimes they can’t. Moreover, political parties can change quite radically. One must therefore look to ruling parties as much as to their opponents for political change.”

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Miriam Mannak

October 3, 2014: Africa’s second largest economy is a land of abundance, boasting vast reserves of coal, platinum, and gold. The country’s natural wealth isn’t, however, confined to the depths below the earth’s surface. She is also blessed with perpetual sunshine and strong, reliable winds, assets that up until recently have gone more or less unnoticed. The main reason being the immense deposits of coal, a substance which for ever and a day has been responsible for over 90% of South Africa’s electricity production.

But things are changing, particularly since January 2008 which brought along rolling power outages and a stuttering electricity supply. The reason: state-owned electricity producer Eskom was no longer able to meet the country’s energy demand due to aged and ailing infrastructure, and ultimately bad planning.

The private sector suffered as a result of the energy crisis, particularly mining houses and other energy intensive businesses. Their supply stream was for instance cut by 10%, to spread the crisis load. As a result, their production and revenue dropped, which led to mass retrenchments and rising unemployment.

Finally, the government presented a plan to solve the issues, comprising among other things the construction of two new enormous coal-fired power plants – Medupi and Kusile – and a renewable energy drive.

Six years have passed since the energy crisis struck South Africa, a period during which the country went from zero to dozens of viable renewable energy initiatives. The Cookhouse wind farm in the Eastern Cape province is one of them. This project comprises 66 turbines with a collective capacity of 138.6 Megawatts (MW). In the meantime some 130km north of Cape Town, the West Coast One project churns out MW after MW. Since December 2013, a new concentrated solar farm has come up in the Northern Cape. According to international solar think-tank SolarPlaza, the Northern Cape is the best location in the world after the Sahara and Australia for such projects.

These and other initiatives are just the beginning. The renewable energy sector might be small when compared to other nations, but it certainly is developing at a fast pace. The main drivers include a growing electricity demand and the fact that the Rainbow Nation has some very favourable wind and solar conditions.

In November last year, the South African Department of Energy signed agreements with 17 new renewable energy developers. This brings the number of green energy projects that have been approved since 2011 to 64. With a collective investment value of £5.5 billion, these ventures combined will generate around 4000 MW. In comparison, Medupi, which is years behind schedule, will put 4788 MW into the grid.

This is good news as South Africa’s energy situation is far from stable. Various reports have shown that this is hurting the investment climate and ultimately the economy.

Take ‘Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises’. This report by the World Bank and the International Finance Corporation analyses how easy it is to do business in 185 economies. It states that energy insecurity makes South Africa difficult for entrepreneurs (rank: 150). The latest World Economic Forum’s Competitiveness Report places the quality of South Africa’s energy supply at 99, out of a total of 144 countries.

Renewable energy expert Jigar Shah praises the steps South Africa has taken with regards to renewable energy. “It is obvious that addicting Africa further to coal and natural gas will lead to no further progress on electrification,” says the first CEO of the Carbon War Room, a global organisation founded by Richard Branson to curb climate change. Currently Shah runs his own solar consultancy firm in Washington DC. “Today, almost everyone sees the future of African electricity in terms of electrifying the hundreds of millions who don’t have access to electricity. That will only come from renewable energy.”

Shah also strongly believes in the investment potential of green energy in South Africa, solar in particular: “An investment in solar is most predictable, particularly in a place like South Africa and the rest of the continent, which isn’t 100% electrified; where the energy demand is high; and where the use of expensive diesel fuel is significant. The output of the sun is very predictable in South Africa, making the country a great solar destination.”

Apart from sunshine, the Rainbow Nation is blessed with favourable wind conditions. “We could generate 20,000 to 30,000 MW from the wind alone, and most likely more,” says Peter Venn, managing director of wind developing firm Windlab in South Africa.

“This country is a great wind energy location, particularly the Western, Eastern and Northern Cape provinces as well as KwaZulu Natal.”

Like Shah, Venn is convinced of the investment potential of wind projects in South Africa, even though the government has signed a mega nuclear energy deal with Russia. The strategic partnership, which is worth £30 billion, will authorise Russia’s Rosatom State Atomic Energy Corporation to build up to eight nuclear reactors by 2023.

Not everyone is happy with this. Opposition parties have voiced their concern, particularly around the lack of clarity and transparency of the agreement’s content. Last year, an unsigned draft agreement was circulated, which sought to give Russia exclusive rights for the construction of nuclear plants in South Africa, forcing Pretoria to seek consent from Moscow should it wish to enter into energy agreements with others.

“This… would be against South Africa’s national interest, limiting our ability to effectively negotiate and plan procurement of nuclear capacity from third parties,” said Member of Parliament and shadow minister of energy Lance Greyling in a statement. “The government’s silence on the matter is unacceptable.”

Others are worried that the nuclear deal with Russia will be detrimental to the government drive to further develop renewable projects.

Venn isn’t worried. “A wind farm takes 18 months to complete, with contracts stretching up to 20 years,” he says. “It takes 20 years to build this nuclear programme. In the meantime, we still need energy. This gap can be filled by renewables.”

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18th October 2013

Analytical investors are always keen to invest at the right moment on a particular stock; they would look at the price earnings ratio – a common metric for valuing companies. A low P/E suggests that a stock is relatively cheap and a high one suggests it is overpriced.

Avid market participants prefer what is called the “Shiller P/E Ratio” named after Nobel laureate and Yale University Professor Robert Shiller. The Shiller P/E is also known as the cyclically adjusted price earnings ratio (CAPE) – it is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings. If the ratio is above the long term average of 16, the stock market is considered expensive. Robert Shiller, author of “Irrational Exhuberance” who predicted the dot com and housing bubbles says the CAPE is remarkably good at predicting returns over the period of several years. CAPE stands for cyclically adjusted price earnings ratio and is constructed to smooth out corporate earnings cycles to determine if stocks are cheap or expensive- the ratio is calculated by dividing the S&P 500’s current price by the index’s average real reported earnings over the last ten years. By comparing a company’s multiple year P/E ratios to its historical average, the investor can try to decide whether the shares of a particular company are cheap without being misled by short term blips. The 10 year period is the most favoured timescale, though some people work with 3 year or 5 year histories, when doing this each year number is calculated using the previous ten years, so the end result is a moving average.

The Shiller P/E is a more reasonable market evaluation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. The Standard & Poor’s 500 trailing P/E now stands at 16.87, above its long term historic average of roughly 15.5. The Shiller P/E for the S&P 500, on the other hand, is 23.2. That is, 40.6 percent higher than its historic mean of 16.5, even after the recent sell off and suggests limited upside for equities going forward.

CAPE inflated by biased earnings?

Jeremy Siegel, Professor of Finance at the Wharton University says the predictions from the CAPE ratio are bearish, in an article that appeared in FT he said “all but nine months in the past 22 years the Cape ratio has been above it long term average”, and the ratio currently predicts well below average returns. He says that the claims of “bears” who say that the current earnings are unsustainably high is not true, the earnings of U.S stocks which have risen to more than 150 percent are unlikely to fall and higher P/E ratios may propel stocks even higher. Prof. Sieger says that the CAPE ratio is based on “biased earnings data”- he explains that the changes in accounting standards in the 1990’s, forced the companies to charge large write offs when assets they hold fall in price, but when assets rise in price they do not boost earnings unless the asset is sold. For example: AIG wrote down $ 80 billion which Siegel believes will skew the S&P P/E  ratio for the next 10 years. This change in earnings pattern is evident when comparing the cyclical behaviour of S&P earnings series with the after –tax profit series published in the National Income and Product Accounts (NIPA). For the 2001-02 and 2007-09 recessions, S&P reported earnings dropped precipitously due to a few companies with huge write offs, while NIPA earnings were more stable. Yet, before 2000, the cyclical behaviour of the two series was similar. Downward biased S&P earnings send average 10 year earnings down and bias the CAPE ratio upward. In fact, when NIPA profits are substituted for S&P reported earnings in the Cape model, the current market shows no over valuation. Prof Siegel calls the Cape “the single best forecaster of long-term future stock returns”. But he says the data on which it is based are now unreliable, sending out a false signal that stocks are expensive. Prof Siegel recently told CNBC that the Dow could hit 17,000 this year.

Both academicians have enthusiastic backers: Prof Shiller is defended by market bears while Prof Siegel has been embraced by the bulls.

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