Where to invest in South Africa

South African equities are set to turn the corner, with investors believing that the market is currently undervalued.

According to Eben Louw, Portfolio Manager at Naviga Solutions, South African equities have seen significant foreign outflows and extreme bearish sentiment from the global investment community.

The 2023 Alexander Forbes Large Manager Watch Annual Survey even showed that local asset managers have down-weighted their allocation to local equities over the past 5 years, dropping below the long-term average of 55% to 40%.

“This bearish sentiment and continued outflows have resulted in depressed valuations,” said Louw.

“Based on a forward price-to-earnings ratio, the JSE is currently trading almost 30% cheaper than the level it typically trades at compared to emerging market peers, and close to 40% cheaper than the typical level compared to global equities (MSCI World).”

“Your investment entry point, i.e., the price you pay, is one of the most important drivers of future returns. Therefore, the current discounted valuations increase the likelihood of outsized returns in the future.”

Although short-term drivers remain uncertain, small shifts in sentiment could result in significant value being unlocked for local equities.

On the local front, improvements in load shedding and the nation’s logistics sector and even a free and fair election on Wednesday, 29 May, could help.

Moreover, improved global growth, an interest rate cutting cycle, a push to emerging markets, and a weaker dollar could also help boost local equities.

“For the patient investor, local equities offer strong return potential because of its attractive valuations and a wide range of potential catalysts,” said Louw.

“While you wait, you will also have the benefit of capturing dividend yields of between 5 and 10% from high-quality companies.”

Not the only one

Several other investors share similar sentiments with Louw, with the latest Bank of America (BofA) Fund Manager Survey showing that a net 53% of investors expect equity growth over the next 12 months.

“Domestic stocks are expected to lead the rally post-elections, with economic sensitives and heavy industrials showing increased positioning,” said BofA.

Furthermore, a separate Bloomberg survey showed that investors are widely convinced that stocks, bonds, and the rand will continue to improve after the national elections.

Although the ANC is expected to lose its majority, it is believed that it will choose a market-friendly partner as its coalition partner, with many expecting the IFP to become its election partner.

“The election uncertainty has been weighing on South Africa, so an outcome that rules out a populist government would be received well by the market,” said Kaan Nazli, a portfolio manager at Neuberger Berman Asset Management.

Nazli said that a market-friendly outcome would also allow the government to focus on structural reforms to boost economic growth.

Read: The businesses that can’t wait for the elections to be over in South Africa