Money flooding out of South Africa

Investors are dumping South African assets. In the first quarter of 2024, foreign investors sold a net R36 billion of local equities, up 25% from the previous year. 

The JSE’s capital markets director, Valdene Reddy, revealed this in an interview with CNBC Africa. She explained that foreign ownership of South African companies has decreased. 

The decline in foreign investment into local companies is largely due to South Africa’s weak economic growth over the past decade and its deteriorating relationship with Western countries. 

Africa’s largest stock market has seen its weighting in emerging market indices declining around 3% over the past few years. 

“We’ve seen it come down where you talk to the local companies, and they say their shareholder register of foreign ownership has decreased,” Reddy said. 

“It differs in terms of different names and counters, but it has generally decreased across the board.”

This activity is largely concentrated in the top 40 to 60 stocks listed on the JSE, while specific sectors, such as exporters and companies with significant offshore operations, have been less affected. 

The selling off of local equities continues a trend that started in 2017 – the last year South Africa experienced a net inflow into local equities. Each subsequent year has seen at least R100 billion leaving the country. 

Economists at the Reserve Bank conducted a study revealing the significant impact this has had on South Africa’s economic growth, with foreign investment desperately needed to stimulate economic activity. 

The graph below shows that stronger economic and asset price growth periods have historically been strongly associated with equity and bond inflows.

Things may get even worse

Business leaders have warned that outflows may worsen and that the JSE may suffer another decade of disappointment. 

Old Mutual chairman and former Finance Minister Trevor Manuel wrote in the company’s annual report earlier this year that investors have withdrawn R1 trillion from the country in the past decade. 

Manuel said the main causes of this have been regulatory uncertainty and the government’s “execution stasis,” with its reforms being implemented incredibly slowly. 

He explained that this is unlikely to change quickly, risking further outflows and the JSE’s underperformance compared to its global peers. 

“This money is being redirected to competing markets that appear to have a more sound governance and regulatory foundation.” 

“This is a stark reminder that Africa, particularly South Africa, has to compete to attract and retain investment,” Manuel said. 

He warned that a negative election outcome would only exacerbate the negative sentiment surrounding South Africa and further scare off foreign investors. 

Trevor Manuel
Old Mutual chairman Trevor Manuel

Ninety One portfolio manager John Biccard explained that South African equities had been weighed down by state capture, load-shedding, rising sovereign debt, failing infrastructure and heightened crime levels. 

Biccard said this has resulted in a lot of bad news being priced into local stocks, making them attractively valued. None of these issues are likely to be resolved quickly.

The JSE All Share Index has returned just 2% in US dollars per annum over the last ten years – a far cry from the S&P 500’s 12% annual return. 

“These numbers reinforce the mantra of US ‘exceptionalism’ versus South Africa as a failed state,” Biccard said. 

“With respect to the valuation of South African shares, it is clear that the market expects the next ten years to be at least as bad as the last.”

Local equities currently trade at the largest valuation discount ever relative to both the MSCI Emerging Markets Index and the MSCI World Index. 

Biccard said this is with respect to all the valuation metrics that matter – price-to-earnings ratio (P/E), dividend yield, EV/EBITDA and price-to-book.

Positioning is also at an extremely negative level, with foreign investors voting with their feet and selling R710 billion rands worth of South African equities over the last seven years. 

Local investors have joined the exodus following the National Treasury’s decision to allow pension funds to invest up to 45% offshore. 

The average Regulation 28-compliant fund now holds just 39% in South African equities versus nearly 70% 18 years ago.


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