Investors are betting big on South Africa

Institutional investors remain positive on South Africa’s equity market as the economy looks set for a large boom.

Stonehage Fleming director JP du Plessis said that the stability and delivery by the Government of National Unity (GNU), the encouraging inflation backdrop and likely near-term interest rate cuts could result in the long-awaited boom in the economy and JSE.

Following the 2024 election at the end of May, the ANC lost its majority in parliament for the first time in the democratic era.

Thus, President Cyril Ramaphosa created a GNU, which has been joined by the DA, IFP, PA, FF Plus, Rise Mzansi, UDM, PAC, Al-Jama Ah, Good, and UAT, making up over 70% of parliament’s representation.

Du Plessis said this could unlock corporate South African investment and create jobs.

For instance, the JSE All Share Index returned 4.1% in June, with domestically focused JSE-listed companies were the biggest beneficiaries of the political events, as the JSE Financial Index returned 13.2% for the month.

Although improved investor sentiment has provided a short-term boost for the JSE, future stability in the GNU and better delivery from the new administration will be vital in stimulating investment and economic growth.

This would result in an improved medium- to longer-term operating environment for domestically focused companies.

The current economic cycle would provide further support, as inflation is now within the SARB’s target range, interest rate cuts are likely in the next six months, and critical SOEs (Eskom and Transnet) are seeing improved performance.

“After navigating the pandemic and subsequent recovery (albeit muted), many local corporations, listed and unlisted, find themselves in a healthy financial position and yearn for an environment conducive to investment and growth,” said Du Plessis.

“While it is too soon to speak of an inflexion point, corporate confidence levels have already improved. Management teams of domestic-focused JSE-listed companies reporting results after the GNU formation have expressed cause for optimism in their outlook statements.”

Despite the recent rally, many JSE-listed companies are still trading below long-term average valuation multiples following a depressed sentiment and muted returns.

Although Stonehage Fleming hasn’t made any material changes in response to recent political events, if the domestic environment continues to improve, it will increase exposure to companies that generate the bulk of their revenues in South Africa.

Momentum Investments shares a similar sentiment, with its preference biased towards domestic asset classes over global counterparts for the upcoming year due to more attractive valuations and the potential for rand strength.

That said, unlike Stonehage Fleming, Momentum Investments is attracted to the global diversification of JSE-listed companies.

“With less than half of the SA equity market’s production, revenue or earnings generated within the borders of SA, the aggregate SA equity market is not overly sensitive to local developments or the rand,” said Momentum Investments.

“The valuation metrics of the SA equity market have reset to consistently lower levels since the pandemic.”

“SA equities remain very under-owned by local and global portfolio managers, enhancing their rerating potential should there be positive surprises on the domestic economic growth front or if a global risk-on environment takes hold.”

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