Wal-Mart/Massmart deal part of a trend?

When news of the recent deal between Wal-Mart Stores of the United Sates and South Africa’s MassMart Holdings first came to the surface late last year, Bloomberg Business Week interpreted it as a possible “signal (of) a shift towards Africa as another deal-making destination for multinationals” after Asia has for the last decade been the go-to continent for companies interested in tapping into fast-growing economies.

The magazine noted that besides the Massmart-deal, HSBC Holdings was in talks over a controlling stake in Nedbank Group (a deal that eventually did not materialise), “and Japan’s Nippon Telegraph & Telephone is buying Africa’s biggest technology company, Dimesion Data. In all, more than $15 billion in deals have been announced across Africa since July (2010)”.

A growing number of companies from the US, China, Japan and Britain are eager to tap the potential growth of a continent with one billion people, especially given the weak outlook in many developed nations, Bloomberg reported.

However, a United Nations report, Global Investment Trends Monitor, released last week found that foreign direct investment (FDI) inflows into South Africa slumped by just under 78% from $5.7 billion in 2009 to $1.3 billion in 2010 as part of a large fall in the figures for the sub-Saharan region as a whole.

The long-term prospects, however do seem positive for Africa. According to another Bloomberg report investment  into Africa from the emerging giants of the developing word, like China and India is on the up.

Since 2005 India has spent some $16 billion on the African continent  and China at least $31 billion.

Part of the big lure, besides Africa’s abundance of natural resources, is the fact that the continent has hundreds of millions of potential customers, who are underserved. Some estimates have it that consumer spending in Africa might double to as much as $1.8 trillion by 2020.

The SA-picture

While traditionally foreign investors tended to favour government bonds as an investment vehicle into South Africa, there are now indications that it might be switching to equities in local companies. From January 3 to January 13 cumulative net purchases of bonds were R1.4 billion compared to R3.2 billion for equities.

The CEO of the JSE, Russel Loubser was earlier this month reported as saying that “in terms of inflows in 2011 on the JSE, I would expect that the commodity sector would be one of the key beneficiaries; it will be on the wish list of many foreigners. Another sector is the food and retail sector”.

The apparent shift in emphasis from bonds to equities seems to point to growing confidence in the robustness of growth in the local economy this year.

Ratings agency Fitch last week also revised South Africa’s outlook from negative to stable, saying the country has emerged from the recession with its credit fundamentals roughly in line with, or slightly better, than, its peers. It also said it expected real GDP growth to have recovered to 2.8% in 2010 after contracting in 2009.

In the meantime David Shapiro, head of Sasfin Holdings’ security unit in Johannesburg, told Bloomberg that foreign companies likely will rely on South Africa, the continent’s biggest economy, as a springboard into markets such as Kenya and Nigeria. South Africa is like the “head office for the rest of Africa.”