Liquidity refreshments

Liam Robb's series on overseas investments continues with a look at South Africa and Spain
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The Independent Online

While South Africa's white elite enjoys one of the world's highest standards of living, the black population is amongst Africa's poorest; half the adults are unemployed and 80 per cent of black homes are without electricity.

Widespread poverty means low savings rates and 24 cents from every rand collected in taxes goes towards servicing government debt. The economic pressures on the country's population of 42 million find their release in crime. South Africa is the world's most dangerous country with a murder every 29 minutes. Instituting market-led policies in order to attract overseas investment - while achieving greater social justice - is now Nelson Mandela's greatest challenge.

Because the ANC relies on much of its support from the unions, Mandela has been forced to take a gradualist approach to privatisation. However, the recent budget which aims to liberalise exchange controls - allowing institutions to invest a proportion of their money offshore - has been generally well received by the investment community and should go some way to addressing one of the stock market's major weaknesses, namely a severe lack of liquidity.

Although the Johannesburg Stock Exchange (TSE) is the largest in Africa with a market capitalisation of more than 10 times that of all other African markets combined, and the world's 12th largest in terms of value, almost 80 per cent of the shares are controlled by just five big groups - industrial holding companies such as Anglo American and life assurance giants such as Old Mutual and Liberty Life.

De Beers, the diamond extractor, is one of the most actively traded stocks and gold remains vital to South Africa's economy with the country's output of 600 tonnes a year accounting for 30 per cent of the world's total.

"The mining sector constitutes a sizeable chunk of the index and to some extent you've got to try and predict the future direction of global commodity prices in order to gauge the likely direction of the stock market," explains Neil Gregson, fund manager of Credit Suisse's South Africa Fund.

Although the rand is at last beginning to strengthen, the currency lost almost 30 per cent of its value in sterling terms last year with the result that, for UK investors, the JSF dropped by 16 per cent.

While relatively bullish on commodities, Gregson also has high hopes for industrials such as South African Breweries, (which benefits from low beer taxes and a growing East European demand for beer), and electrical companies like Plessey and Reunerts which are expected to do well on the back of an expanding telecommunications industry which last week received a boost with the government's sale of a pounds 790m, 30 per cent stake in Telkom.


Since the death of General Fraco in 1975, Spain has managed a rapid and relatively peaceful transition to democracy. The economic priority now is to meet the convergence criteria for monetary union in 1999, of which Spain is a wholehearted supporter. Surprisingly, it looks to be one of the few countries likely to meet those criteria; inflation has fallen below 3 per cent for the first time since the late 1960s and unemployment is down to 2.2m - its lowest level since 1981.

Founded in 1831, the Madrid Stock Exchange (MSE) provides the main forum for equity trading with 700 companies listed and the index dominated by banks, utilities and communication groups. The recent drop from 56 to 20 per cent on the tax payable on equity profits and the fact that interest rates remain low have ensured that equities have become much more attractive to private investors.

Trading volume on the MSE has quadrupled in the last five years. The sale of the government's remaining pounds 3bn, 21 per cent stake in Telefonica was seven times oversubscribed and points the way for further large disposals. Endesa, the electricity group, is due to further tap the markets towards the end of the year and the state's remaining 10 per cent stake in Repsol, the oil and gas conglomerate, is scheduled for this Spring. Because of the country's determination to join the first wave of EMU, Benito Vera, Spanish analyst at Salomon Brothers, remains bullish on the banking sector. A tourist industry which accounts for nearly 20 per cent of GDP ensures that companies like hotel group Sol Melia are also on the buy-listn

Performance Statistics: Datastream. Country-specific unit trusts include Credit Suisse's South Africa fund and Save & Prosper's Southern Africa fund. Old Mutual manages the South Africa investment trust. Numerous funds have exposure to the Spanish market. Jupiter's European unit trust and TR's European Growth investment trust are among the best performing.

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