South Africa: Making the best of a challenging
environment

Despite myriad socioeconomic challenges, consumers and business owners in South Africa are resilient and optimistic about the country’s future. Two of our emerging markets portfolio managers share insights gained on a recent grassroots research trip to Cape Town and Johannesburg.

The views expressed are those of the authors at the time of writing. Individual teams may hold different views. The value of your investment may become worth more or less than at the time of original investment.

High-level observations

  • While near-term consumer confidence is low, the people we met share a strong sense of cultural pride and are optimistic about South Africa’s future.
  • We found most corporate management teams to be of high quality, looking past the challenging domestic situation by pursuing growth opportunities outside South Africa.
  • High unemployment and a difficult macro environment exacerbate racial divisions and hamper growth.
  • We believe that if the new government can make progress, well-managed companies could enjoy strong growth potential.

There is no sugarcoating the problems facing South Africa. Home to 58 million people, the country has suffered from years of slowing economic growth, political dysfunction, racial discord, high unemployment, rampant crime and violence toward women, and weak infrastructure. While the macro situation is dire, we believe that much of the negative investor sentiment is priced in. If the new president, Cyril Ramaphosa, delivers on promised reforms and fiscal improvements, we believe well-run, innovative companies could benefit from a growth tailwind.

On a recent grassroots research trip to Johannesburg and Cape Town, we met middle-class consumers in their homes, conducted an online survey of 1,000 respondents, and led focus groups to learn more about people’s concerns and aspirations. Through our research, we have identified several trends that consumer-focused companies across a range of sectors may be able to exploit.

Trend: Millennial consumers desire financial freedom; focus on value

Unemployment in South Africa is high, with younger workers bearing the brunt. The jobless rate among millennials — who comprise 26% of South Africa’s population — is 34%, and it is a staggering 55% among workers under age 24.1 From our meetings, it was clear that millennials aspire to financial freedom, which most defined as having a good job, being debt free, and owning a home. Many of our interviewees still live with their families and work two jobs (or “side hustles”) to make ends meet. Given sharp rises in the prices of fuel, food, and property, young consumers feel the need to be smart about spending.

Pantry stocking during sale season, store loyalty programs, and down trading from brand-name products to local private labels is common. Millennials enjoy in-home entertainment such as barbecues (or braais) and satellite TV, preferring to downgrade TV packages rather than terminate them. They are cutting back on eating out and taking holidays. Shopping is planned, specials coveted, and budgets carefully minded.

An exception is fashion and beauty. The women we met consider beauty purchases to be staples, not luxuries. Women millennials associate this type of spend with self-motivation and a necessary reward for hard work. In general, we were encouraged by the…

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1Department of Statistics South Africa, 2019.

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