International investors are still interested in corporate South African opportunities in spite of the challenging macroeconomic environment.
Although the Institute of International Finance (IIF) said that non-resident investors were net buyers of $2.0 billion (R37 billion) of South African bonds year-to-October, they were net sellers of $0.8 billion (R14 billion) worth of equities.
JSE data also showed that there were net outflows of bonds of R312 billion and equities of R116 billion from January to September this year.
However, Jarrett Geldenhuys, Head of SA Equity Capital Markets and co-head of Investment Banking at Investec South Africa, said that there is a growing engagement between some of the leading South African-listed corporates and an international institutional client base – an encouraging sign for 2024.
“This includes significant US institutions who are earnestly assessing opportunities,” said Geldenhuys.
He added that international institutions believe that the peak in global rates is nearly here, pushing many to pay more attention to emerging markets, using the relative historical emerging market outperformance from this pain point.
“What has also become apparent is that there’s a lack of interest in the local macro environment and non-existent positioning on any confidence in a reform narrative – so it’s clear that making a call on a new entry point into a South African corporate is as much a Fed rate call as an individual company decision,” Geldenhuys said.
“Consensus is certainly still out on whether we have troughed, turned, or are still heading downwards on the consumer front, but hopefully, we are in the vicinity of an inflection point.”
Although feelings are mixed between sectors – with banks being bullish and retailers being cautious – the general consensus is that economic recovery is not factored into corporate thinking besides a slight reprieve in load shedding.
Tell me a story
Geldenhuys said that there are two key investment narratives getting the most attention regarding emerging markets:
- The biggest and best continue to reinvest for future market share gains and/or new product lines.
- Scaled businesses with believable self-help narratives, where expectations of margin expansion yield earnings growth, with the latter expected to drive a valuation re-rating.
However, there is also a third piece of interest in value creation, where strong management teams are focused on transformational M&A.
Geldenhuys said the third bucket of interest creates a powerful trifecta for value creation: where perceived strong management teams are focused on transformational M&A.
“Again, with the macro-outlook depressed, it remains a ‘show me’ story. There is merit to this opinion though, as M&A bankers still view the valuation expectation gap between buyers and sellers of assets as inhibitive for the bulk of transactions coming across corporate desks.
“This is especially the case when added to international investor perceptions about competition regulation as a business enabler,” he said.
Geldenhuys said that all three narratives share the common theme – the ability to grow in a no-growth environment.
“It’s clear that the age-old, value-based building blocks of an investment decision are back in favour with international investors again: only the best management teams; ensure the quality of the moat around the business; ensure the investment case is easy enough to explain to the internal investment committee; and it is often better not to lose money in emerging markets than to make money, so ensure the risk-adjusted returns have ample room for safety, especially post events in Russia, Ukraine, Turkey and China.”
Against these intense demands, South African management teams are highly regarded, with certain business models highly prized on the international stage.
“The global rate cycle might have made South African companies more attractive than last year, despite the deterioration of local investment climate,” said Geldenhuys.
“However, as an investment destination, we seem firmly back on the opportunity radar, without the burden of expectation of any positive shift in local fortunes.”
When it comes to pricing South Africa’s path compared to alternatives, Geldenhuys noted that any optimistically based investor would be looking for a maintained shift in sentiment.
“When combined with the quality and resilience of our corporates, such a shift implies we could be back to long-forgotten equity return trajectories,” he said.
“Now we are just left with the simple matter of assigning a probability to that outcome, and from our vantage point, without constructive policy reform, it is best to remain selective in our optimism, as will international investors.”