International investors take R95 billion out of South Africa

South African equities may be experiencing a boom, but international investors are still taking a wait-and-see approach.

Jason Swartz, Portfolio Manager at Old Mutual Investment Group, said that JSE-listed equities have seen a ‘tear’ recently due to positive domestic news flows and local investor sentiment, which is pushing share prices higher.

This can be seen in the latest Bank of America Fund Manager Survey, which showed that a net 89% of respondents were overweight on South African equities, with a particular focus on banks, apparel retail and general industries.

The projected total returns for equities over the next 12 months are 17%.

However, it will take renewed foreign investor interest to push local equities back to more sustained levels.

Swartz said that foreign investors are still taking a wait-and-see approach to local markets.

“Despite the recent strong showing by the JSE, South Africa is currently experiencing an underwhelming show of foreign confidence in our stock markets as foreign investors are still exiting the market, with around R95 billion leaving the country year-to-date (to week ending 6^th September 2024).”

“While this flow is somewhat distorted by the inclusion of dual-listed and ADRs, adjusting for this anomaly still suggests a lacklustre interest by foreigners in our market. This is also despite local equities having weathered recent global market upheavals better than many of its peers.”

For South Africa to improve foreign investor sentiment, state-owned enterprises (SOEs) must perform far better alongside a stable centrist GNU and sound policymaking.

Where next

As the final quarter of 2024, domestic financial markets are also caught between two forces.

South African Inc. shares are performing well locally due to a 6-month reprieval from load shedding and the primarily positive political outcome following the 2024 National Elections.

Swartz said that the improved sentiment has been reinforced by local asset managers reining in some offshore exposure in favour of onshore exposure due to concerns of heightened global risks and excessive valuations.

However, there are concerns over the possibility of the US entering a recession.

Although it may seem counterintuitive, a US recession is bad news for South African asset class, as investors adopt a ‘risk off’ approach and invest in more stable markets like the US.

However, there is good news for local investors as the bond and equity markets and the rand show strong resilience in the face of global market troubles.

“There are also a few ‘tailwinds’ that could insulate domestic asset classes from recession including the upside risk of higher trend GDP growth outlook, the potential for interest rate cuts, and strong turnarounds at SOEs like Eskom and Transnet,” said Swartz.

“If these improvements persist, then South Africa could once again find a place in global investors’ emerging market portfolios.”

“Local financial markets also have the potential to shrug off the ‘liquid proxy for emerging markets’ tag and emerge as a good growth story in their own right – we have to play a different role to the likes of Brazil, China and other emerging market peers.”

Local capital allocations are at capacity in South African asset classes and are already heavily invested in local nominal bonds and equities.

“Within the dual context of regulation 28 and local fund managers’ value bias, SA investors are unlikely to maintain local asset classes at pre-Covid heights based on local improving sentiment alone.”

“The game changer is for improving foreign investor sentiment and their return to domestic markets. We need foreigners to step back in to introduce the levels of liquidity necessary to take the JSE to the next level.”

“Despite the recent re-rating, South African assets remain undervalued. It is hoped that improved investor sentiment will unlock more value in asset classes through the final quarter of 2024, however this value unlock will also depend hugely on clear signs of local economic reform.”

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