What to keep in mind when investing in South Africa

 ·1 Jun 2024

When investing in South Africa, it is important to consider the investment’s timespan.

According to Craig Sher, head of R&D at Discovery Invest, the key consideration when making a decision is not the amount being invested but rather how long it will be invested.

“For most investors, savings terms are many years or decades, and they often have specific goals, like retirement income, their children’s future education, or a bequest motive,” said Sher.

“In this case, asset classes like local and global equities are the most appropriate because they are most likely to generate higher returns while short-term volatility will be manageable. These investors should steer away from ‘less volatile, conservative assets’, which will most certainly not meet their goals.”

For shorter-term investments, such as a few months or years, the primary focus shifts to capital preservation.

Thus, asset classes like cash and fixed-income instruments will be best for the short term.

Therefore, whether you are investing a small amount or a large amount, the main question in determining how you should invest it is when you will need the money.

Discovery Invest’s Craig Sher

Where to invest

Many investors are bullish on South African equities, believing that the market is currently undervalued.

The latest Bank of America (BofA) Fund Manager Survey shows 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.

A separate Bloomberg survey indicated that investors are widely convinced that South African stocks, bonds, and the rand will continue to rally after the national elections.

The ANC is expected to lose its majority, but it is believed that it will choose a market-friendly partner for a coalition. Many expect 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 indicated that a market-friendly outcome would also allow the government to focus on structural reforms to boost economic growth.

According to Eben Louw, Portfolio Manager at Naviga Solutions, South African equities have seen significant foreign outflows in recent years, and it could be a good time to buy.

“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.”

Read: Election vote counting at 17% – where the parties stand, and when to expect final results

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