Basic survival - Why Agri investments makes sense

I am not the greatest investment fundi, but I have read enough books and studied enough financial/investment theory, to have developed some sort of a opinion on investments in general.

I am a avid believer and follower of buffetology - hence I would rather spend time on analysing a business or industry's core competitive advantage and strategy, than spend weeks on end trying to establish whether a share is undervalued (in order to make speculative short term trades) - hence this post.

I really truly believe in the importance and future of African agri-business.Yes, South African agriculture offers great opportunities but also risks - especially with regard to the land redustribution and certain "ruling party youth league intellectuals" and their calls for "grabbing" farm land. But the reality is this, all business opportunities has underlying risks - and more than often, if not allways, the most successful investors/entrepreneurs are those taking the risks everyone else seem to deem too risky.

Why African agri-business? Well two simple reasons - first, the world's population is growing (people need to eat and allready shortages exist - basic supply and demand) and secondly, Africa has a agricultural potential so immense and untapped that the only logical consclusion would be to get stuck in - before the rest.

Obviously not many people have the financial or technical means to go and buy a grain or cattle farm and get their hands dirty, but surely this is not your only option. An extremely attractive alternative that I believe offers great potential is a JSE listed company called ZEDER investments. The company is the brainchild of PSG boss jannie Mouton who is widely considered as one of SA top businessmen and entrepreneurs and is backed by a highly regarded directorate. It is well diversified into several of the different "agri value chains" through shareholding in listed entities such as Kaap Agri, Distell, Capespan and Pioneer foods, to name but a few. This is defenitely a long term investment opportunity not to be missed.

Competitiveness – How to secure South Africa’s slice of the “Global investment pie”

When it comes to FDI and broadly speaking economic growth, many SA leaders foster a short term, narrow minded mentality, one of taking the easiest route to secure the greatest short term benefit. Instead of implementing policy that favours FDI, government stumbles along with its mindless business-unfriendly policies. For some reason ANC leadership still believe (despite what happened in the previous apartheid regime) that they can run a country in its own little isolated bubble. Certain rhetoric of “this is our country and we will do as we want” resonates clearly and if anybody dare say anything, they are labelled as either a racist, or as a “white colonial capital slave”.

That is why I believe this whole BRIC’s thing (note the lowercase‘s’) is in actual fact a joke. SA can’t compete with its fellow members – not even close. What I am willing to agree with is that the inclusion of SA in the “big boys club” is far more for their benefit than for ours. This whole BRIC’s scenario, in my humble opinion, only creates a false perception that SA is comparable to its “bigger brothers”. A perception that “we are on the right track”, or/and “we don’t need to change”. The problem with this “state of false perception” is that it may just subtract from the urgent need for a wake-up call, especially in terms of policy reform needed to increase FDI and overall global perception. It is important to realise that the only ones really taking note of the whole BRIC’s thing is SA, and understandably the other 4 nations (Not being that significant – given they invited us).

SA is globally competitive in some industries, such as the financial and pharmaceutical industries but highly lag in competitiveness in for instance the manufacturing industries. I guess it would be fair to say that SA is especially uncompetitive in terms of our unskilled/less skilled labour industries – worrying since this is also where the majority of the countries unemployed labour force resides. SA can simply not compete with its BRIC counterparts when it comes to the cost of unskilled labour. Also, throw in our incredibly strict labour law policies (which would be considered problematic – even in a skilled labour market) and suddenly we seem to have a huge problem.

Firstly, SA has to become more business friendly. Decreased regulation and interference in our markets (reduction in excessive competition policy wastage), less interference in the labour markets (take the short term knock for long term sustainable solutions), mutually beneficial business incentives, decreased crime and corruption and a larger skilled labour force through education reform.  

Secondly, Infrastructure development – specifically related to our railroad and ports and securing long term electricity supply.

Thirdly, International perception – People need to realise that we are part of a global economy and that the international perception of the country’s economic stability plays a major role in securing economic growth and prosperity. People should be held accountable!

What the FDI is going on?

An article in the Business day (Burkina Faso ‘Tops SA for investment’ – 27 July 2011) really serves as an eye opener to the economic decay currently inherent to the SA political economy. According to the article, SA now ranks in 10^th place with regard to FDI (Foreign direct investment) flows to the African continent. In 2010 SA experienced a 70% decline in its share of FDI as compared to the previous year.

Such statistics are a shocking revelation and show that South Africans either have a distorted view of our country’s supposedly strategic economic superiority (compared to the rest of the continent), or something is subtracting from that superiority to the extent that SA are being overseen for supposedly less attractive options. I strongly believe the latter to be true.

The majority of the problems with FDI investment in Africa are obviously risk related, which is understandable – given that the nature of fixed infrastructure investment dictates long term capital commitments. Africa’s leadership track record of “changing the rules” understandably creates disincentives for such investments. So, the question is, should SA as an FDI destination really be ranked in 10^th place? As much as this seems to be a ludacris thought, it is indicative of the negative political economical image SA currently portrays.

SA boasts with a world class financial sector that far exceeds any other African country in terms of sophistication and efficiency. In support of this argument, the JSE was recently named the “best securities exchange in the world” (world competitiveness report) – an astounding achievement.

The SA financial sector is the single largest contributor to the country’s GDP – an interesting statistic compared to other developing (manufacturing) nations. No wonder portfolio flows has put the local currency under pressure – the SA financial industry offers a unique “developed world” financial sector with the ability to generate "developing world" returns – excellent risk return opportunities.

But SA also offers excellent infrastructure in support of FDI investment, so why does these investments seem to lag portfolio flows by so much. Crime and corruption certainly plays a major role. So too does some of the country's unfriendly business practices, i.e. our incredibly strict labour law policies - a major business disincentive. But most of all - POLITICS!

The liquid nature of portfolio flow investments means that capital invested on the JSE is not nearly as subjected to political risk as FDI investments are. So, with more and more messages of “nationalisation” and anti-constitutional "land-grabbing", combined with the regular misappropriation of words such as "western colonists" and "agents", it is quite understandable that FDI will suffer. The problem is that SA, as any other developing nation or even developed nation for that matter, need FDI – long term fixed investment, not only portfolio flows – although such investments are crucial too.

Sometimes I wonder if the so called “youth Leaders” among us has the slightest idea of the damage and negative economic impact their uneducated blabber impose on the day to day lives of the poor and deprived they  so passionately claim to represent!

Related article

http://www.businessday.co.za/articles/Content.aspx?id=149266

Go for GOLD!

Since January 2008 the gold price has just about doubled from US$800 to a current price in the region of US$1600. This was mostly due to the volatility of the financial markets and the need for investors to place some of their wealth in an asset that would serve as a hedge to the risk inherent to the investment markets. I strongly believe that no other investment asset could even come close to such a return on a risk adjusted basis. Yes, obviously there are some risk in terms of that the actual returns that gold will generate will not be adequate, but in terms of a global financial currency melt down – gold will most probably be the most valuable commodity and measure of value – thus, if all else fail, gold should still be of value – massive value!

Recently a conversation resulted in the following question. Should you invest in gold bullion or gold stocks? To me the short answer of this is to rather invest in the bullion. The reason for this would be that investing in the bullion not only makes for a good investment option in terms of expected return, but also as an effective hedge to the risk of the local currency losing its value, or even to act as the only real store of value should the world experience a total financial melt-down. It serves as a local and international hedge to financial crises’.

Inherent to investing in a gold producing company’s stock is to also invest in the company’s management, operational and business practices and the company’s specific financial risk due to its financing and capital structure. So, while investing in the gold company’s stock may result in equal or even better returns than investing in bullion, it most likely do not provide the hedging or risk advantages that bullion offers. In short – you do not solely invest in the commodity, which may actually be what you intend to or need to do.

In the unlikely scenario of for instance a SA political problem or even war (which I know is unlikely – just using as an explanation for the argument) – any asset priced in Rand currency would most likely lose a huge amount of value – very quickly. In such a scenario holding foreign currency would be a life saver, since the local currency would be rendered worthless within a short while and most other fixed or financial assets would become illiquid and most likely worthless (People seem to forget quite fast that those millions of Rand’s worth of properties they own are only worth as much as someone is willing to pay for it). Gold not only provides an excellent hedge for such a scenario (being that its value is measured in US$), but also provide great return opportunities – given the current world economic trend.

Private equity - The South African case study

Over the past decade the formal South Africa (SA) private equity/venture capital industry boomed, growing at an astounding pace.

Cheap and easily accessible debt, such as the pre-crash boom was characterized for, not only fueled entrepeneurial spirit but literally encouraged leveraged investment behaviour. In South Africa, such as in many other countries, the average "investor"/(speculator) did not need to take on excessive risk in order to generate great returns - at least they thought so. At some stage residential property values were increasing at an astounding nominal rate of 30% yoy. This meant that even the ordinary guy on the street suddenly became a "property investor" (SPECULATOR?) which in turn further fueled the fallacy of "rational" (The price will always rise) behaviour.

We all know what happened next. To get back to the topic at hand, the role of private equity in growing any economy is crucial and can not be ignored. An interesting statistic is that since 2005, up to 35% of all private equity funding in  SA came from government sources (SAVCA). This is a positive sign that at least the SA government realises the importance of entrepreneurial funding in the fight against poverty and inequality.

The question on my mind is simple. Does African and specifically SA leaders/regulators/policy makers recognise the opportunities that this industry poses? Imagine the massive socio economic benefits to be enjoyed and shared, should an investment environment be regulated (deregulated?) in a way to create incentives conducive to mutually beneficial investment outcomes.

By protecting investors and showing respect for property rights through careful and  diligent economic policies, government can succeed in actually shifting a large weight off it's own shoulders. Metaphorically speaking "passing on the ball (problem) to the wide receiver" - with the wide receiver being the private sector "catching the ball (opportunity)".

Given the cost and lack of debt financing under the current economic conditions, especially the latter, it only seems logical that private financing sources will play a larger and more substantial role in providing the African entrepreneur with that all so crucial seed capital. Lets hope every role player "get with the program" - FAST!