Local over global for South African investors

Momentum Investments favours South African assets over global assets, on the back of superior expected fundamentals, more favourable valuations and anticipated rand strength.

It said that several fundamental drivers that were previously headwinds for the South African economy and asset classes have now become clear tailwinds.

“These include the fading impact of load shedding, optimism that the coalition government of national unity (GNU) will accelerate policy reform implementation to push the country’s growth rate higher, as well as falling inflation and interest rates providing support for consumption spending,” said the group.

“Attractive local equity and bond valuations that still incorporate excessive risk premia should also support returns from these South Africa assets.”

“SA cash currently offers an attractive prospective real yield to investors, particularly on a risk-adjusted basis.”

“Among the local asset classes, it is only in the listed property space where there are currently conflicting fundamental and valuation signals that make us circumspect about the risk-reward available in this sector.”

It added that South Africa has been without load shedding for over 200 days, which should have positive implications for both South Africa’s equity and bond markets.

For equities, the combination of a better-performing economy and lower generator fuel costs should support higher company profits.

South African bonds will benefit from better fiscal numbers due to a higher corporate tax take, lower Eskom bailout risk and lower country debt default risk.

Momentum Investments also noted that South African equities are attractively priced versus emerging market equities, with a forward P/E relative that is three-quarters of a standard deviation below the historical average and a dividend yield premium that is now one-half of a standard deviation above the historical average.

The SA equity market remains under-owned within global EM (GEM) funds, with SA currently the fifth-
largest underweight in these funds, said Momentum Investments

“Once these GEM investors start believing that the improvement in SA’s fundamentals is indeed
sustainable, there could be a meaningful flow of funds into SA equities from this source.”

“Furthermore, the exposure of local multi-asset funds to the SA equity asset class remains close to the historical lows that were reached after the February 2022 increase in the Regulation 28 foreign asset exposure limit to 45%.”

It said that the main risk to the longevity of the current positive environment in the South African economy and financial markets would be a collapse of the GNU.

Looking internationally, Momentum Investments says the timing of President-elect Trump’s policys will be crucial.

“Uncertainties about the magnitude and timing of the implementation of President-elect Trump’s proposed policies on tariffs, immigration, deregulation and tax relief, increase the risk of (either negative or positive) policy surprises as 2025 unfolds, which could lead to elevated volatility in global markets.”

Trump recently threatened South Africa with 100% tariffs if it started using a BRICS currency to move away from the dollar, which the government was quick to dismiss.

Read: Positive turn for South Africans earning over R20,000 per month