It may be South Africa’s time to shine

 ·7 Nov 2022

Adriaan Pask, chief investment officer at PSG Wealth, says that investors are looking for opportunities in a difficult macroeconomic landscape, globally – and finding that South Africa still presents a compelling prospect.

“You have to ask yourself if there are any opportunities in this apparent chaos of load shedding, corruption, unemployment and labour disputes,” Pask said. “Given South Africa’s challenges, investors are looking elsewhere for returns – but as many might have discovered, things are not necessarily any easier in foreign markets.”

The macroeconomic picture has become increasingly influential on both opportunities and risks when substantial monetary policy changes occur, said Pask.

For example, developed markets worldwide are grappling with rising interest rates and large debt burdens – meaning that future growth is stalled.

He said that the monetary policy globally continues to be tightened with interest rates hiking to combat inflation, opposing normal growth stimulation practices that the world has seen since 2008.

While South Africa is also riding the rate hiking wave along with the rest of the world, there are economic aspects that compare favourably to other markets.

South Africa, as a hub for local investment, has a relatively good debt-to-GDP ratio of around 70% when compared to abroad. The United States (US), for example, is heading towards 140% debt-to-GDP, and inflation rates are hovering around the 8% mark, said the investment chief.

“South Africa has also seen a commodity boom over the last few years, which have had positive tailwinds for our economy and fiscus,” said Pask, adding that the country’s current account is in fantastic shape as a result.

Compared to the US, the current account has been slipping consistently for a very long time, he said.

“What this means is that on a relative basis, the gap between South Africa and the US as an investment destination is less significant than many believe. And from a debt perspective, we’re actually in much better shape.”

Pask said that when looking at the return generated from South African assets, one can really start to see the case for investment locally.

He listed the following as positives for local investment in South Africa:

  • It is easy to generate 6% cash investment yields while interest rates are still going up.
  • South Africa’s bonds are yielding around 10% to 11%, which is attractive.
  • Valuations for local equities are at single-digit levels, and dividend yields are in excess of 4%.
  • Domestic profit margins remain sound – higher than those of US companies at present.

Pask noted that this does not mean one should steer clear from diversifying offshore. He said the risk of overpaying for offshore assets has started to recede as prices have come down.

The offshore investment provides South African investors with two key benefits. The first is access to a broader range of investment opportunities, particularly from a return perspective. The second is diversification.

PSG Wealth said that once earnings forecasts are set, and the dollar normalises, it hopes to see more assertive offshore investment.

“It’s not to say we don’t invest offshore currently – there’s still a significant offshore component in our portfolios,” it said. “However, there are several risk factors that we are keeping a close eye on.”

“The reality is that all around the globe, there are issues. South Africa is not risk-free by any means, but it seems like global risks are starting to become more prominent as interest rates rise. Bearing this in mind, local might indeed be more attractive over the long term.”


Read: Things in South Africa aren’t as bad as you think: analyst

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