South Africa’s R81 billion investment blow
Foreign investors have been selling off South African equities in 2024, dumping R81 billion worth in the first half of the year.
Market operator JSE Ltd. revealed this in its interim results presentation for the first half of the 2024 financial year.
The company posted relatively poor results, with net profit remaining flat and revenue growing a mere 4.3%, driven by a sharp decline of 12% in trading revenue compared to the same period last year.
Investors were hesitant to commit significant sums of capital to South African assets in the buildup to the country’s elections at the end of May.
Despite the peaceful election and the formation of a more market-friendly Government of National Unity (GNU), foreign investors are still taking money out of local assets.
In the first six months of 2024, foreign investors were net sellers of R81 billion worth of equities. The JSE noted that South Africa’s share of emerging market indices declined as investors favoured India and other Asian economies.
This continued a years-long trend of foreign investors favouring other emerging markets with stronger economic fundamentals over South Africa.
Fairly recently, this has been compounded by local investors also taking their money offshore, with changes to pension fund regulations accelerating this shift.
In its interim results, JSE Ltd. noted that South African investors continue to withdraw money from the country in pursuit of higher returns offered by global equity markets.
This speed of this pivot offshore has taken many by surprise, including the National Treasury. The average Regulation 28-compliant fund now invests just 39% of its assets in South African equities, compared to nearly 70% eighteen years ago.
Over the past decade, asset managers’ offshore allocation has doubled. Local investors have invested nearly an entire GDP in assets outside of South Africa.
The graph below, courtesy of the JSE, shows the trend of money flowing out of South African assets over the past few years.
While South African equities have been hard hit in recent years, local bonds have held up and are attracting billions of inflows.
In the first six months of 2024, foreigners bought R35 billion worth of bonds, led by investments in government bonds.
This has largely been driven by increased optimism surrounding the management of South Africa’s growing debt pile.
With the formation of a more market-friendly government and the continuation of Enoch Godgonwana and David Masondo at the National Treasury, yields have declined, and bond values have risen.
Last month, foreign investors’ ownership share of South African government bonds crossed 30% for the first time in five years, showing renewed interest in local debt.
Head of fixed-income investments at Stanlib, Victor Mphaphuli said the GNU has provided bond investors a rare chance to be positive about political developments in South Africa.
Mphaphuli said the main error the ANC government has made over the past decade is thinking that borrowing money from investors was a one-way street.
“When a government borrows, it has to use that money for industrialisation and infrastructure to stimulate economic growth, create much-needed jobs and generate revenue to repay that debt,” he said.
“Instead, it spent its borrowings on building a patronage economy, with ANC support bolstered by expanding social grants and wage increases for a ballooning public service, including SOE employees. As a result, SA’s debt-to-GDP soared.”
“The only positive throughout this mounting crisis has been the discipline and stability of the Finance Ministry, which fought back to win back its credibility. The markets are starting to reward them for that,” Mphaphuli said.
The GNU has the opportunity to turn this situation around, with South Africa’s future no longer dependent on one political party for the first time.
South Africa is not out of the woods, but Mphaphuli is beginning to see green shoots.
“We believe that if the GNU can work together, it will reawaken the economy, which will make it possible to bring down the debt-to-GDP ratio, achieve fiscal consolidation and build for the future.”
“This hopeful scenario is completely dependent on the longevity and effectiveness of the GNU. It demands that all those involved in it continue to work together for the betterment of South Africa.”
“They have no choice. If they do not, history will judge them harshly, and the electorate will judge them even more harshly.”
- By Shaun Jacobs
- This article was first published on Daily Investor and has been republished with permission. Read the original here.
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