What Do Foreign Investors Think of South African Companies?

To Investors 

Last week I came across a post on X where legendary investor Stan Druckenmiller noted how he became interested in Argentina after noting the high praise with which people spoke about President Milei. 

When Druckenmiller hears about an interesting idea he immediately puts money into it, then does his research later and sizes his position afterwards, once he has a better understanding. 

I copied that idea and asked Perplexity about the five most liquid South African American Depository Receipts (ADR). Today I'm sharing what I learned. 

What Are ADRs and Why Were They Created?

ADRs were first introduced by J.P Morgan in the 1920s to allow U.S. investors to buy shares in U.K. retail company Selfridges, and at their core, American Depository Receipts are a vehicle that allows shares of a foreign company to trade on U.S. exchanges, like the NYSE or NASDAQ, in U.S. dollars. This simplifies the process for U.S. investors to buy shares of foreign companies without needing to deal with foreign currencies or navigate the intricacies of foreign exchanges and foreign regulatory environments.  

ADRs help companies access a wider investor base, improving their visibility and liquidity in global markets.

The presence of ADRs can serve as a signal highlighting companies that have gained enough attention in a country to warrant interest from some of the world’s largest and smartest institutional capital allocators. 

ADRs also provide a glimpse into which areas of an economy are seen as strengths or growth opportunities by the global financial community.

ADRs and the South African Market

The 5 most liquid ADRs from South Africa based on trading volumes according to investing.com are Sibanye Gold, Gold Fields, Harmony Gold Mining, Sasol, and DRDGold. 

Over the last five years, of these names, Harmony Gold Mining and Gold Fields have provided investors with the most returns (+200%), and DRDGold has returned over 100%.

The five best performing ADRs in the last year are Harmony Gold Mining (+178%); Capitec Bank (+109%); Nedbank (+70%); Naspers (+54%); Standard Bank (+52%). 

The growth of these stocks also sheds light into where the world sees growth in South Africa, and it's of course in the largest economic sector in the country: the Finance, Real Estate, and Business Services sector. 

Here’s a list of all of the South African ADRs according to investing.com

From this list we can tell that the technology, communications, and services sectors of the economy are still underdeveloped areas for South Africa, which warrants lower trading volumes, marking companies in these sectors generally as longer term investments.

Foreign investors are more familiar with the mining/resources part of the South African economy because of the rich history of this sector, which is why companies in the mining/resources sector have higher trading volumes.

The diversity of the listed ADRs above show the diversity of the South African economy and the range of growth areas present in the South African economy from a foreign investor perspective. There are many other sectors of the South African economy that are obviously not represented and this is where I think lies the most potential for growth as a capital allocator and builder. 

I hope you enjoyed reading this letter 

On the journey to becoming a master capital allocator, one lesson down, a billion more to go. 

Chat soon, 

-Mansa