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Good, bad and ugly: 3 UK shares with South Africa exposure

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National flags of Brazil, Russia, India, China and South Africa on poles
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With one third of the country unemployed, a former president sentenced to jail and anaemic GDP growth, South Africa is a complex investment destination. Covid-19 and lockdowns have injected calamity to decline. Still, this is the most advanced economy on the continent. South Africa boasts a world-class financial sector and natural resources. Here are three UK shares I’m watching with different sorts of exposure to precarious South Africa.

The good

Sylvania Platinum (LSE:SLP) is a producer and developer of platinum group metals (PGMs), platinum, palladium and rhodium. It has enviable low-cost operations in the element-rich Bushveld Igneous Complex and stellar recent performance. It got back to full production rapidly after the severe initial lockdown in the first half of 2020. Its third-quarter results to 31 March 2021 boasted net profit of $41.3m, more than double the prior quarter’s $20.3m. Fantastic cash reserves also enabled a once-off windfall dividend of 3.75p per share in April.

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Moreover, Sylvania interests me as a bet on commodity prices and a hedge against inflation for investors in UK shares. The likes of UBS reckon platinum undersupply will continue while demand grows for the metal in catalytic converters and jewellery. With chatter about global inflation, commodities are a good defence against losing value to rising consumer prices.

The evergreen caveat with commodities is that prices can dip for extended periods, and even the best producers won’t win when that happens.

The bad

My “bad” stock is Old Mutual (LSE: OMU). Established in Cape Town in 1845, the insurance and financial services giant is a pillar of South African commerce. That makes it less of a bet on the business itself than on prospects for “South Africa Inc.”.

South Africa’s output growth has declined steadily from just over 3% in 2011 to zero before the pandemic. The economy shrank 7% in 2020. Covid-19 responses have depleted an already creaky fiscus. And politicians aren’t helping.

A planned constitutional amendment to allow land reform, likely in the shape of confiscation of land without compensation, is a frightening reminder of Zimbabwe’s violent farm takeovers and ensuing economic collapse. If this goes ahead, my outlook for South Africa and businesses that rise and fall with it turns dour.

I retain some hope that political haggling will scrap at least the “without compensation” part of the plan.  

The ugly

Mediclinic (LSE:MDC) runs private hospitals in South Africa. It serves a small elite who pay for private medical insurance. The harsh truth is that an unfortunate majority of people in this unequal society have no choice but to use the poorly resourced public system. However, that already regrettable status quo could change disastrously.

The proposed National Health Insurance (NHI) Bill would establish nationalised universal healthcare. A single, taxpayer-financed NHI Fund would buy healthcare services for the entire population from both public and private providers.

We don’t need the minutiae of the plan to calculate its potential for calamity. This redistributive system would spread too few medical resources among too many people, just as the wealthy tax base is fleeing. Doctors and nurses are departing, too.  

Owners of Mediclinic International’s UK shares can take solace in the company’s operations in Switzerland and the United Arab Emirates. But I won’t be buying while nationalisation is on the cards.

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Ian Macleod has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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