South African stocks are rocking – with a warning

Local assets have soared in the months following the formation of the Government of National Unity (GNU), with interest rate cuts and fresh stimulus in China further boosting their value. 

However, this may not last long as foreign investors and companies adopt a wait-and-see approach to investing in the country, looking for evidence of tangible change and sustained economic growth. 

South African stocks and bonds have rapidly increased in value over the three months since the formation of the country’s first coalition government at a national level. 

The JSE All Share hit 13 record closing highs and has appreciated just below 10%, the rand strengthened by 7.8% against the dollar, and the yield on government debt dipped below 10% for the first time in two years. 

While much of this has been attributed to the GNU, which includes ten political parties, global factors have also been at play. 

FNB Wealth and Investments CEO Bheki Mkhize told Daily Investor that what happens in the US and China is almost as important for the performance of South African assets as local politics. 

In particular, the rand has not strengthened as much as the US dollar has weakened due to the world’s largest economy potentially being on the edge of a recession and the Federal Reserve aggressively beginning its interest rate cutting cycle. 

Furthermore, the announcement of fresh stimulus from the Chinese government, which is seeking to revive its economy, has given local stocks a second wind. 

This has a significant impact on local stocks as many are directly or indirectly exposed to the Chinese economy. Naspers and Prosus, for example, are directly exposed through their ties to Tencent. 

The performance of many of South Africa’s mining companies is also closely linked to China’s economic performance, as it is the largest destination for local commodities. 

As a result, what happens in China also strongly influences the value of the rand through foreign exchange earnings. 

“I think that the China story is just as important, and you are beginning to see the impact of some of the stimulus there,” Mkhize said. 

“Normally, when the Chinese economy is doing well, it tends to be good for commodity prices, it tends to be good for the rand, and it tends to be good for our market.”

And so, despite the initial GNU-fuelled relief rally which continued on the back of sustained optimism, the performance of South African assets is also based on factors outside the control of local politicians. 

These factors are also highly volatile. It is not clear whether the Chinese economy will sustainably grow at elevated levels again nor that the US Federal Reserve will pull off a soft landing. 

One swallow does not make a summer

It is also unclear whether the optimism seen in financial markets will translate into tangible economic development. 

Mkhize said there are clearly green shoots in the South African economy, particularly the progress made in reforming the electricity sector and logistics. 

“I think the work that is happening with Operation Vulindlela is great and fantastic. However, there is also the point that ‘One swallow does not make a summer’.” 

Foreign investors and corporates are going to wait to see if there is evidence of sustained economic growth and tangible reform before committing capital to the local economy. 

“I think it is a question of the people wanting to see that this is not a once-off, whether it be the relief from load-shedding or the business-friendly environment, before coming in – especially the foreign investors.”

Old Mutual’s Jason Swartz made a similar point in a recent research note, saying the country needs to attract foreign investment to sustain the rally local assets have experienced. 

Foreign investors are yet to return to South Africa’s equity markets. While they have poured billions into local government bonds, they have been net sellers of stocks to the tune of R95 billion so far in 2024. 

To do this, the country needs to provide investors with evidence that its new government is driving structural reforms in key sectors of the economy and has the potential to last until the next election. 

For the pendulum to truly shift on foreign investor sentiment, there needs to be more movement around improved performance from state-owned enterprises (SOEs), alongside a stable centrist GNU, and sound policymaking. 

Swartz explained that getting foreign investment into South Africa is vital because local asset managers are already nearly at capacity in local assets. 

Many have been heavily investing in JSE-listed equities and bonds in recent years, picking up the slack left by foreigners as they searched elsewhere for returns. 

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

“We need foreigners to step back in to introduce the levels of liquidity necessary to take the JSE to the next level,” Swartz urged. 

Mkhize echoed this sentiment, saying that FNB’s Wealth and Investments division has picked up from market activity and that the recent rally has been largely driven by local investors.

Furthermore, much of this has been driven by these investors investing cash that was sitting on the sidelines. This could be driven by increased interest in the JSE due to its performance or by interest rates coming down and reducing the attractiveness of cash.

Mkhize said FNB had not picked up a significant rise in investments from foreign investors or local corporates, as many maintain a wait-and-see approach.

Importantly, money invested in local stocks and bonds is referred to as “hot money” as it can leave at the tap of a button, and so does not necessarily contribute to long-term economic growth. 

For that to occur, fixed investment needs to pick up in South Africa, Mkhize said. This requires sustained economic growth and policy certainty, as companies have to be able to plan for years before building a factory, a mine, or opening a local subsidiary. 

“In terms of fixed investment, there people want policy certainty and clarity regarding how the economy is going to grow. These people have the option of investing in other jurisdictions,” Mkhize said. 

“For example, mining companies have to think particularly hard about these things as their investment horizon for a new project can run up to thirty or forty years. They have to be certain the current environment will prevail or improve.” 

“This is where local politics becomes a major factor in driving economic growth and market performance.”