South Africa back to 1998

Foreign ownership of South African stocks is at levels last seen in 1998 as investors have dumped local assets over the past decade and are yet to meaningfully return. 

This is feedback from Morningstar’s Victoria Reuvers, who outlined some of South Africa’s significant challenges in 2024. 

Among these challenges were the notable challenges of energy security, slow economic growth, a weak rand, and the country’s inclusion on the Financial Action Task Force’s greylist. 

They combined to create a flood of negative sentiment around South African assets, resulting in many foreign investors reducing their exposure to local stocks and bonds. 

Coupled with South Africa’s credit rating descending three notches below investment grade, also known as ‘junk status’, foreign investment plummeted in the past decade. 

The decline in foreign ownership of local assets has been so severe that the Reserve Bank has warned it threatens South Africa’s financial stability and security as its capital markets dry up. 

It also puts increasing pressure on local financial institutions to pick up the slack left behind by foreign investors selling South African assets. 

This is particularly concerning for local government bonds as financial institutions are increasingly exposed to a single common risk in the state. 

Reuvers revealed that the negative foreign sentiment towards South African assets has resulted in foreign ownership of our equity market being at levels last seen in 1998. 

In the first half of 2024 alone, foreign investors dumped R81 billion worth of South African equities, according to the JSE. 

Including the months until the end of November, they have been net sellers of local stocks to the tune of R113.3 billion in 2024. 

This continues a decade-long streak of foreigners being net sellers of local equities, with outflows exceeding R988 since 2015. 

Local investors have increasingly joined their global counterparts in reducing their exposure to South African assets. 

While financial institutions have had to pick up the slack from foreign investors dumping assets, they have also turned their attention offshore. 

South African investors have more than doubled their offshore investments in the past decade. This makes these investments almost the size of the country’s entire GDP. 

Local investors have been increasingly looking offshore for better returns and access to sectors unavailable on the JSE. 

Large financial institutions have noted this trend for a while, increasing their offshore offerings and making it easier for South Africans to invest globally. 

This, coupled with regulatory changes, has resulted in the average Regulation 28-compliant fund now investing just 39% of its assets in South African equities, compared to nearly 70% eighteen years ago.

Over the past decade, asset managers’ offshore allocation has doubled. Local investors have invested nearly an entire GDP’s worth of assets outside of South Africa.

Some investment managers have said investors are taking their money out of South Africa because of the poor performance of local assets compared to their global counterparts. 

Ninety-One’s John Biccard said the JSE had experienced a “lost decade”, with their returns being relatively flat and unattractive to asset managers. 

Former Finance Minister Trevor Manuel made it clear that when this money leaves South Africa, it will go into other markets that investors view as more attractive. 

Manuel emphasised the role of regulatory uncertainty and execution stasis in preventing foreign investment in South Africa. 

“Against this backdrop, it is crucial that regulators adopt a pragmatic approach, striking a balance between fiscal requirements and providing clear regulations and long-term regulatory certainty,” he said. 

“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.