Why Trump could be good for South Africa
South Africa has long struggled with its reputation as a volatile and risky emerging market, but is now becoming a favorite among investors seeking to navigate a world with Donald Trump as the US president.
Goldman Sachs Group Inc. to Societe Generale SA say the country’s currency, stocks and bonds could outperform EM peers in 2025, protecting portfolios from global turbulence around inflation, trade and geopolitics. They see the country as relatively sheltered from any shocks of Trump’s policies.
His pledges — from tariff hikes to spending plans and deportations — are already rattling money managers because of how they can bring back inflation, reduce the room for monetary easing and weigh on local growth. EM currencies have all but erased their gains for the year and stocks are deepening an underperformance relative to richer nations. Bond yields have risen since September as policy concerns outweighed the Federal Reserve’s two interest-rate cuts.
South Africa, however, stands apart. The nation is winning its fight against inflation, cutting price growth even below the low point of its targeted range. The Reserve Bank has lowered benchmark borrowing costs twice this year, and has room for more. Bonds offer some of the highest returns in the world, even as the nation moves up the credit-rating scale. Johannesburg stocks, despite rallying twice as fast as the broader EM benchmark this year, trade at a valuation discount.
“South Africa could be an attractive investment opportunity next year due to the idiosyncratic local story and simply the lack of alternatives in the EM world,” said Marek Drimal, a strategist at Societe Generale in London. “The country offers a solid mix of elevated nominal and real rates, relative insulation from geopolitical tensions and somewhat less direct exposure to potential US trade tariffs.”
The country, which witnessed inflation of as high as 7.8% in the post-Covid period, has managed to cut it to 2.8% — becoming one of the biggest success stories in the emerging world over the past two years. That also makes its bonds juicy to investors: The 10-year sovereign yield is still around 10%, meaning a real return exceeding 7 percentage points.
Benign inflation, and the Fed’s interest-rate cuts, have enabled policymakers to cut the policy interest rate by 50 basis points. But they remain cautious – offering traders the assurance that real rates will remain attractive in the near future.
Meanwhile, The rand has given investors the best carry returns this year among emerging-market currencies, except Argentina’s peso and Turkey’s lira. While high yields and a stable currency have brought the biggest inflows since 2019 into local bonds, overseas ownership remains low because of outflows in the previous years. Outsiders own just a quarter of the government debt, around the lowest level since 2011.
Turnaround Story
“Foreigners have been disinvesting,” said Andrew Matheny, a Goldman Sachs economist, citing that as a factor driving inflows as a turnaround story takes shape.
After years of crippling electricity shortages, listless economic growth, political upheavals and the loss of its investment-grade rating, South Africa has embarked on economic reforms under a government of national unity.
“If they succeed in restoring fiscal credibility, execute their budget to plan, the growth picks up, they stabilize debt, then you can get a bull flattening of the yield curve as well as a further tightening of asset swap,” Matheny said.
Economists project gross-domestic-product growth to accelerate this year and the next two, while credit-rating companies are beginning to take a favorable view of the country. S&P Global Ratings raised South Africa to positive from a stable outlook. Goldman projects both S&P and Fitch Ratings will upgrade the country, leaving it one notch higher from the current BB Minus grade and “on its way to becoming a double B plus credit.”
China Connection
South Africa is unlikely to attract a frontal tariff assault from Trump, given its measly $4 billion trade surplus with the US, compared with China’s $260 billion and Mexico’s $205 billion. However, as a commodity-driven economy closely tied to the world’s second-biggest economy, there could be some ripple effect. Plus, China is witnessing a slowdown even without Trump. Morgan Stanley warns South Africa could be dragged by all that.
“The reform story in South Africa should continue to play out, but we think the market is already pricing in a lot of the positive catalysts going into 2025,” analysts including Arnav Gupta wrote in a note. The bank initiated a bearish rand trade with a target of 19.25 and a stop at 17.40.
But bulls say South Africa is now an idiosyncratic story that can keep giving well into 2025. SocGen is already shorting the US dollar against the rand, betting on a 5% upside.
The nation’s appeal also comes from the struggles that almost every other emerging market finds itself in. China’s slowing growth and potential US tariffs cloud its outlook, while economies like Mexico and Turkey remain vulnerable to geopolitical risks and inflation pressures. Even investor darlings like India face challenges as high valuations and monetary tightening curb enthusiasm.
All this is light at the end of tunnel for South Africans, literally. Just last year, they were grappling with record power cuts, with outages of as long as 12 hours a day. This year, they have gone 246 days without load shedding.
“The South African market is the most exciting part of the portfolio right now,” said Adriaan Pask, PSG Wealth’s chief investment officer.
“From a risk perspective, conditions have improved substantially. And from a return perspective, there’s still meaningful upside.”
- By Mpho Hlakudi and Colleen Goko (Bloomberg).
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