Foreign investors take R124 billion out of South Africa

South Africa’s market has seen a substantial rally, but more is still needed to convince international investors.

Since the formation of the Government of National Unity (GNU), sentiment has turned positive in South Africa, leading to a rise in asset prices and a stronger rand.

That said, although the GNU’s economic growth potential is an appealing explanation, the drivers behind asset price movements are more complex and multifaceted.

The recent rally in South Africa has been mainly driven by local investors, with foreign participation still minimal.

“South Africa remains one of the most underweighted markets among emerging markets (EMs), which themselves hold a minimal share in global portfolios due to the strong performance of US equities,” said Mikhail Motala, Fund Manager PSG Asset Management.

“While foreign inflows have ticked up slightly since the election, net foreign flows over the past 12 months to 30 September 2024 reflect outflows totalling R124 billion, a stark contrast to the ‘Ramaphoria’ period in early 2018 when net inflows exceeded R30 billion.”

Fears around election outcomes prompted a risk-off stance among local investors at the start of the year, with sentiment impacted by load shedding, Transnet’s struggles and weak economic growth.

Moreover, amendments to Regulation 28 of the Pension Funds Act, which raised offshore investment limits from 30% to 45%, led to local investors moving further capital abroad.

“Roughly only half of the South African stock market can be classified as “SA Inc” companies, while the remaining 50% is evenly split between JSE-listed rand hedges (such as Naspers, Prosus, Richemont, and British American Tobacco) and the resources sector,” said Motala.

“Within the “SA Inc” segment, many peer portfolios are heavily concentrated in three sectors: banks, retailers, and consumer staples (including drug and grocery stores and food producers). This concentration is largely due to the relative size and liquidity of companies within these sectors compared to others.”

Although great investment opportunities are in South Africa, Motala said that discretion is required. Valuations, growth prospects and capital return potential (dividends and share buybacks) differ considerably.

He added that there are attractive investment opportunities residing across this SA Inc. landscape, but discretion is required. Valuations, growth prospects and capital return potential (dividends and share buybacks) differ considerably.

More to come

“We believe that tailwinds from an improved economic backdrop, off a very low base, will continue to provide earnings underpin to SA Inc shares. Given the low valuations these shares were trading on until recently, they still offer value compared to other areas of the global market,” said Motala.

“It should also be kept in mind that once foreign investors regain confidence in local equities and return to our markets, it could provide a further boost to our market’s performance.”

“However, to benefit from the strong performance of SA Inc. shares, investors have to ensure that they obtain true SA Inc. exposure.”

“We believe many of the best opportunities reside in overlooked (and less popular) parts of the market. As always, partnering with a manager with a proven track record of selecting future winners will be key.”

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