South Africa needs a perfect storm 

South Africa needs global and local factors to align for it to achieve significantly faster economic growth that can meaningfully improve the lives of its citizens. 

This would be a perfect storm of growth drivers that align simultaneously to propel economic growth to 5% per annum. 

While South Africa is making strong progress on implementing key reforms to boost private investment in the economy, it cannot be separated from the global economy. 

This is feedback from Melville Douglas’ head of South African equities, Paolo Senatore, who explained what it would take to unlock local value. 

Melville Douglas is Standard Bank’s boutique asset manager that focuses on bespoke solutions for high-net-worth individuals and families. 

Senatore said the only way to unlock the value in South African assets is through much faster economic growth. 

Local assets already offer strong yields, which attracts investor interest. However, the country has no growth story as its economy has stagnated. 

For this to change, many factors have to come together, and it is not all in South Africa’s hands, with much resting on global developments. 

Senatore explained that it is naive to think that South Africa can be separated from the global economy, as it is relatively small but highly open. 

Many of the country’s largest companies are closely tied to global events, particularly in its mining, finance, and technology sectors. 

Senatore explained that mining companies are reliant on global demand for their commodities, while many of South Africa’s financial institutions have expanded into Africa to boost returns. 

The largest holding in many investment funds, Naspers, is also a fundamentally global company through its investment in Tencent. 

This means that the fate of thousands of jobs and billions of rands worth of invested capital is bound up in the performance of the global economy. 

Senatore pointed to the Manuel Era of rapid economic growth between 2004 and 2008 as evidence of this fact. 

This era saw South Africa’s economic growth at an average annual rate above 4%, with more than 1 million jobs created. 

Much praise has gone Trevor Manuel’s way as the finance minister during this period, but global factors played their role. 

China’s economic rise during this period generated strong demand for South African commodities, boosting exports and the local economy. 

This gave the government money to invest, pay down debt, and create a world-class social safety net. It also created thousands of jobs in the mining industry. 

The perfect storm

For South Africa to achieve growth of 5% or more, supporting international factors have to be coupled with local reforms. 

The good news is that these reforms are happening. However, they are taking place far too slowly, Melville Douglas’ chief investment officer, Bernard Drotschie, said. 

“The ongoing reforms are a critical but slow-moving engine. While there is a clear national consensus on what needs to be fixed, the actual execution remains a mixed bag,” Drotschie said. 

In particular, progress on reforming South Africa’s logistics and water sectors remains slow, despite some signs of improvement. 

Rail volumes have improved significantly, but remain below pre-Covid levels. Port turnaround times have improved, but local ports remain ranked among the worst in the world. 

With regard to the water sector, Drotschie said it is in crisis and requires significant investment and substantial work. 

The positive here is that the government is turning to the private sector through public-private partnerships to deliver infrastructure projects. 

This is vital because private money is held to a very high standard, reducing scope for corruption, wastage, and delays. 

It also means the private sector will play a larger role in the South African economy than in the past, which will unlock faster economic growth and get capital off the sidelines. 

Melville Douglas, head of equity at Mervin Naidoo, said that if local reforms can be combined with global factors, the potential return on South African assets is significant. 

Naidoo explained that there are currently pockets of excellence and growth in South Africa, with sectors such as private education booming. 

However, the advantage of a much faster-growing economy is that the stock market return will be broad-based. 

Naidoo said that during the Manuel Era, all major segments of the market enjoyed strong returns, which is rare and provides good opportunities for outperformance. 

The South African equity market’s price-to-earnings ratio re-rated by 36% (from 11 times to 15 times earnings), and total market appreciation exceeded 200% over that period. 

This created significant wealth for local investors, which, in turn, boosted the local economy as consumer spending rose. 

Naidoo said that such an environment is difficult to create today, as consumers are under pressure, unemployment is high, and the low-hanging fruit for the government is harder to reach.