Foreign investors are steering clear of South Africa this year as investment opportunities do not look as promising as they used to.
Luigi Marinus, Portfolio Manager at PPS Investments, said that following a volatile 2022, global equity markets saw a slight rebound while local equities delivered more modest returns.
According to Marinus, for the first quarter of this year, the equity market (measured by the FTSE/JSE Capped) was up 2.4% even though the index was down 2.0% in March on the back of poor performance by the banking sector.
Although there was a slight improvement in local equities, underlying instability and an inability to predict the market have increased the risk associated with South African companies.
John Gilchrist, the co-chief investment officer of PSG Asset Management, said that business shares in South Africa are being priced at excessively pessimistic levels, often forgetting that local businesses have been facing depressed economic conditions for years and still performing adequately.
Gilchrist added that when risk is involved, investors’ assumptions about a country are often overly positive or negative.
“Investors often express the desire to avoid ‘risk’ – most often when market conditions become volatile, and the outlook is uncertain,” said the investment officer.
The most recent data from DFM Global, an independent discretionary fund manager, reported that there had been high levels of capital outflows from local equity and bond markets in South Africa.
DFM Global said that the capital outflow from foreign investors started in the third week of the year and accelerated in February and March.
As of the latest readings, over R170 billion in South African shares and bonds have been sold by international investors since the start of 2023.
Volatility and the lack of an obvious reward for investing are two primary factors driving away conservative investors that are seeking more reliable and smoother return profits.
Slowed economic growth caused by load shedding paired with regulatory failings such as the recent greylisting have also contributed to suppressed interest in the country as an investment destination.
PwC’s latest Economic Outlook report for South Africa reported that when a country is greylisted, there is a significant decrease in total capital flows.
Research by the International Monetary Fund (IMF) showed that when emerging and developing countries were greylisted during 2000-2017, it resulted in a drop in capital flows equal to 7.6% of GDP over a period of nine months.
In the case of South Africa, the financial services firm reported that businesses had experienced a diverse range of impacts from the greylisting, including:
- Deferred foreign investments;
- Increased transactional and compliance costs;
- A Negative impact on stock market non-listed company valuations.
Another spoke in the wheel of foreign investment has been the surprising move by the South African Revenue Service (SARS) to up exchange controls, making global investors more hesitant to invest in the country.
Speaking with BizNews, Brenthurst Wealth founder, Magnus Heystek, said that investors are willing to go places where their money may be more appreciated.
South Africa is overestimating its role in the world economy and is trying to throw its weight around when in fact, it has little effect.
For example, the country has been neutral and referred to Russian president Vladimir Putin as a ‘friend’, implying it is cozying up with the West’s public enemy number one.
“We are very dependent on Europe, UK, the US and Australia for trade, and we are not making friends,” said Heystek. “We could pay the price for that.”