Is Zimbabwe the Next Emerging Market Dynamo?

This week we learnt that China is about to overtake Japan and become the world’s second biggest economy.

Who’d have expected that 20 years ago? Not many people, from my memory.

China is a classic case of what can happen when an emerging economy really takes off. And it has spurred investors everywhere to try and unearth the next big thing amid the ranks of ‘frontier’ markets.

And you can’t get much more frontier than Zimbabwe. It’s had the most horrific economic problems. Yet one of the UK’s top fund managers is starting to invest in the country.

So is this the real deal? Or will Zimbabwe still be a basket case come 2030? Let’s take a look…

Mention Zimbabwe to almost all investors and you’ll probably get a very negative reaction. And that would be no surprise at all. It’s an African state that’s gone horribly wrong – and then some.

Now I’m not going to attempt even a potted political history here. That’s not what Money Morning is about. But this quote from the independent Zimbabwean economist Vince Musewe just about sums it up.

After Zimbabwe got its independence in 1980, ‘in our naiveté we assumed we’d witness the rise and rise of a liberal and democratic social economy’, he says. ‘With an educated populace, our expectations were that we’d inevitably become the “intellectual” capital of Southern Africa, if not Africa. How wrong we were!’

To cut a long story short, the economy became a total disaster area. The government mismanaged things badly. The ‘land grab’ from white farmers ten years ago led to a collapse in food production.

GDP and exports slumped, while unemployment hit a staggering 80%. The country got involved in the war in the Congo, which proved terribly expensive. And the whole place has been riddled with corruption.

Indeed the only area where Zimbabwe actually became a world leader was in its inflation rate. Or to be more precise, its hyperinflation rate.

The country had long had a nasty inflation problem. But when the government started minting money by the ton to pay its bills, the rate really took off. It reached over 100% a year in 2001.

Yet the printing presses were simply cranked up even more. Arrears owed to the IMF, salary payments for public workers and soldiers – they were all paid for by simply producing more and more banknotes.

Of course, this doesn’t create any more wealth. It just pushes up prices. By December 2008, the cost of living was rising at “6.5 quindecillion novemdecillion %” a year, according to Wikipedia. I’ll take their word for it – but in practice, it means prices were doubling every 1.3 days.

In fact, Zimbabwe seems like it’s been on a completely different planet. So why on earth, you’re probably asking, would anyone want to invest good money in a country like this? Surely there’s no point in even thinking about such a place?

Well, here’s the surprising bit. The outlook for the country is gradually picking up. Just over a year ago, the government stopped printing the Zimbabwean dollar. Zimbabwe now allows trade in the USD and the euro, sterling, South African rand and Botswana’s pula. Inflation actually fell below zero within weeks of the move.

Sure, the inflation danger hasn’t gone away. And there are still “smart” economic sanctions in place. Without getting into the politics, President Mugabe doesn’t have a good reputation on the human rights front.

But the economy is starting to recover. Civil servants are being paid again, which has meant schools and hospitals could re-open. There are plans for a privatisation programme. And the economy is backed by significant mineral wealth that’s yet to be exploited. It could yet realise those hopes of 30 years ago.

Now we’ve heard this sort of thing before about Zimbabwe. At the end of last year it was described as the “ultimate recovery story” by Ambrose Evans-Pritchard in The Telegraph. Yet the economy is still hugely dependent on imports to survive.

But this month, another reason for eyeing Zimbabwe has just appeared. Top fund manager Neil Woodford has just used over £15m of the money he manages for Invesco Perpetual, to buy a near-30% stake in a Zimbabwean firm called Masawara (LN: MASA).

The group invests in the country’s agro-chemical, insurance and property sectors. It’s also planning to move into oil, mining and agriculture, as well as buy privatised assets.

So what should private investors make of all this? And should they follow Woodford by buying into Zimbabwe?

Of course, the Invesco Perpetual star player doesn’t get it right all the time. He’s backed a few wrong horses, and clearly Zimbabwe is a high risk and controversial bet that could yet go very awry.

But Woodford is no short-term punter. He’s a long-run income fund investor who can sniff out a real bargain, and is prepared to give it enough time to be recognised by the rest of the market. So when he put that amount of money into somewhere as offbeat as Zimbabwe, it’s enough to make me think it’s worth doing likewise.

To repeat, this would be a high risk, long-term investment. It would be sensible to keep it as a relatively small part of your portfolio. But over several years it could pay off incredibly well. Remember China.

David Stevenson
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK).

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