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Investing during economic recession

By Nhlanhla Nyathi

A CLASSIC marketing case study goes: two marketing executives set out on a fact-finding expedition from their US base to establish the market potentia

l of branded wrist watches manufactured by their company to a new target market.

One executive returned from the expedition and drew the conclusion that it would not be worth the company’s effort to explore the new market because no one in the target market had a wrist watch, implying that there was no effective demand.

The other executive presented a different view indicating that the target market had huge untapped potential as no one had a wrist watch, implying that potentially everyone could be a customer for their product.

This typical age-old contrarian view from arguably equally qualified and experienced professionals of the same situation brings to mind the lone decision by LonZim to invest in Zimbabwe’s productive sector at a time when most multinational companies are either scaling down operations or relocating to other markets because of the effects of an eight-year economic recession.

Diverse views are the main drivers of individuals and corporate entities to invest or not to invest in line with personal risk preferences and investment objectives.

Financial markets work efficiently when there is a healthy flow of divergent views, which incidentally inspire good volumes of buy and sell orders.

When one investor decides to buy because of the different view that they hold from the seller, it provides a good opportunity for a transaction to take place inspiring a market with depth.

Success or failure following the decision to invest will only become apparent when good return on investment (ROI) numbers come through after a certain period of investment. The point at which those good return numbers come to fruition is a delicate factor controlled by the timing of the investment and persistence towards achieving intended goals.

Some would wonder why LonZim, a special purpose investment vehicle established by Lonhro Africa, would invest £30 million in Zimbabwe at a time when the economic operating environment is classified as a no-go area with many predicting a further fall as long as support from multilateral institutions is withheld.

Timing of the investment becomes a critical factor in LonZim’s inevitable success or failure in the Zimbabwean market.

During the fundraising campaign for LonZim in London, the chief executive officer of Lonhro Africa, David Lenigas, argued that Zimbabwe had suffered from several years of severe underinvestment and consequently offered massive upside potential with careful and well-informed investment strategies.

Lenigas said the company was strategically positioning itself for the post-crisis era.

In essence Lonrho is planning for the post-Mugabe era.

Arguably, Zimbabwe’s economic problems are subject of a horrible phase in its dark economic history and will at some point subside. At some point the massive market potential of Zimbabwe will be unleashed and the true colours of its vast platinum, gold, diamond, coal, and natural resources will benefit well organized entities that invest at some point for the future.

The question that remains glaringly unanswered is: when will the economic turnaround take place for those investors that have already committed long-term capital such as LonZim in the country for them to reap the ROI benefits?

Unfortunately, the answer to this question involves predicting the outcome of the current intermediation initiatives by the Sadc heads of state to the political impasse and Zimbabwe’s frosty relations with multilateral institutions controlled by the western world of which at this point it is difficult to determine.

Despite all these unknowns there appears to be distinct advantages to investing in Zimbabwe now than later. The decision to invest now implies negotiating with a Zimbabwe government desperate for foreign direct investment and obviously more susceptible to make concessions now than later when the economy recovers.

In addition, several years of underinvestment have compromised the true value of most Zimbabwean assets that can now be purchased at a significant discount.

A number of analysts have indicated that the total market capitalisation of the Zimbabwe Stock Exchange has declined in real US dollar terms over the period of the economic recession.

In essence, foreign investors can now do business with a vulnerable government and strategically set up their infrastructure for the long term in preparation to reap the benefits when the economy recovers.

Investing later would prove more difficult because once the economy recovers there will be an influx of foreign direct investment giving the government latitude to be more selective and stricter to potential investors.

Even then, the government might be focused on some other objectives that might not be as generously conducive to foreign investors.

A good example demonstrating that investing later is slightly more complicated and occurs at a higher premium was the Barclays Bank Plc decision to initially pull out of the South African market in 1986 and its return to the same market after the apartheid era.

Barclays pulled out of the South African market in 1986 following pressure from anti-apartheid protesters and as a result lost its banking licence in that market.

South Africa subsequently achieved black majority rule in 1994 and the thrust in government was to empower black business people through a number of black economic empowerment (BEE) programmes.

The new dispensation presented Barclays with a predicament on how to re-enter the same market when such BEE programmes were going to be a barrier to them getting a new banking licence ahead of black South Africans.

To get a share of the banking business in South Africa, Barclays had to purchase a 54% stake in Absa for £2,6 billion in 2005.

The transaction was the largest ever foreign direct investment in South Africa and occurred at a 36,4% premium to the price prior to the cautionary announcement relating to the transaction. In addition, the transaction occurred after a complicated eight-month courtship.

Unlike yester-year when the decision to invest was left in the hands of a handful of potential foreign investors, Zimbabweans in the diaspora have become potential investors in their own country because of access to foreign currency and continued earnings in foreign currency.

What is required is an organised programme that would channel these resources in the short term for infrastructure development and brand building during the economic recession. Benefits of the investment will become apparent after recovery of the Zimbabwean economy.

In stock market circles, seasoned investors know that you buy when the market is falling and sell when the market is rising.

LonZim seems to have applied this concept exceptionally well. It only needs to nurture its investment, strategically set up infrastructure and establish good brands during the economic recession in preparation for economic recovery.

* Nhlanhla Nyathi is a director of LCE Capital, a private equity firm. He can be contacted on 0912 250 092.

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