Local Market View: A year of optimism and opportunity
Jonel Matthee-Ferreira
In Q4 2024, South African markets offer a truly compelling story of resilience and transformation amidst global uncertainty.
While key economic indicators are sending mixed signals, recent developments, such as the stabilisation of the power grid, suggest a cautiously optimistic outlook.
This was also the view at the recent Cogence Summit held in Johannesburg, where investment thought, and business leaders suggested that South Africa is primed for growth, but only if the public and private sectors continue to work together.
Bond markets
The local bond market has stood out this year, driven by relatively high yields.
We’ve seen only one rate cut, with a chance for another by the end of 2024, reflecting the South African Reserve Bank’s cautious approach that carefully balances inflation and growth prospects. With global inflation proving more sticky than expected, keeping interest rates higher for longer, our underweight position in inflation-linked bonds has benefitted the portfolio.
The subdued pace of rate cuts has only enhanced the appeal of South African bonds to investors seeking inflation-beating returns with added stability.
Global investment flows into South Africa’s bond market have been steady, reflecting growing confidence in the country’s fixed income landscape. But for sustained growth, international investors will need to see continued structural reforms that support long-term stability.
As a discretionary fund manager with a focus on cutting through market noise, we believe that South Africa’s bond market provides a resilient anchor for investors navigating turbulent global waters.
Equity markets
At the Cogence Summit, Ninety One CEO Hendrik du Toit called the Government of National Unity (GNU) a “period of significant change” that could reset South Africa’s economic trajectory – if handled decisively.
Discovery Bank Chair Reuel Khoza added that the GNU is shifting South Africa’s image globally, with political cooperation replacing long-standing divisions. While the GNU initially boosted investor sentiment, strengthening the rand and driving modest inflows into South Africa’s equity market, similar to the “Ramaphoria” of 2018, global investors are now cautious, sitting on the sidelines until they see more sustained change.
It will take more significant and long-term reforms for South Africa to attract large-scale sector flows into the equity market.
This sentiment is not unique to South Africa, as global investors are showing increased selectivity within emerging markets. While there is growing positivity around emerging markets, investors are carefully considering valuations, as demonstrated by recent sell-offs in Brazil and Mexico, while China and South Africa have seen strong rallies. India, a positive growth story for several years, also remains attractive but emphasises the need for a selective approach across emerging markets.
Given this cautious sentiment, we are currently 1% underweight in local equities and 0.3% in local cash to fund our exposure to SA bonds and global assets. Although we are slightly underweight, we remain positive on South Africa.
Domestically focused sectors within SA Inc. – including retail, financial services, and industrials – have seen a rally on the Johannesburg Stock Exchange (JSE). The manufacturing sector, traditionally an economic backbone, has shown encouraging signs with recent rises in the manufacturing index, suggesting potential recovery and economic momentum.
South Africa’s market may still face headwinds, but sectors such as manufacturing and retail offer attractive long-term opportunities.
Structural reforms and investor confidence
As of October, South Africa has enjoyed over 200 consecutive days without load shedding. Stability in the national electricity grid is perhaps one of the most significant developments of 2024.
At the Cogence Summit, Eskom Chair Mteto Nyathi highlighted the role of public-private collaboration in achieving this milestone. The government’s increased commitment to working with the private sector, along with partnerships across the energy and logistics sectors, signals a positive shift, notably with plans to strengthen state-owned enterprises like Transnet and Eskom, which have traditionally been barriers to sustainable growth.
The potential exit from the Financial Action Task Force’s grey list, anticipated by mid-2025, would be another major boost for foreign investor sentiment. The move would signal that South Africa’s financial systems align with international anti-money laundering standards, alleviating what has been a key hesitation for global investors.
Continued improvements in governance and transparency remain vital, especially as investors weigh the risks of local markets against the backdrop of broader geopolitical and economic challenges.
Property and manufacturing stand out
The JSE has experienced a 12.1% increase since the beginning of the year, driven by renewed growth in sectors that previously lagged.
The property sector, once out of favour, is enjoying a resurgence driven by both foreign and domestic investor interest. In addition, SA Inc. companies, especially in retail and financial services, are contributing positively to market performance. The rebound in these sectors reflects both cyclical recovery and a broader optimism surrounding South Africa’s economic trajectory.
Within the manufacturing sector, the outlook is more encouraging than it has been for years. A combination of a stabilised national grid, increased efficiency, and a slight uptick in consumer confidence has buoyed the sector, suggesting that growth in manufacturing may be sustainable.
If these positive indicators continue, South Africa’s manufacturing base could play a pivotal role in its economic recovery, providing much-needed employment and infrastructure development.
Capitalising on global trends
While domestic opportunities are growing, South African portfolios are strategically positioned to benefit from international markets, particularly in sectors experiencing transformative growth. The US technology and infrastructure sectors, notably the AI and data storage industries, offer compelling growth prospects with robust fundamentals.
South African investors are increasingly looking offshore, where high-yield assets in infrastructure and technology sectors provide diversification and reduced sensitivity to South Africa’s economic cycle.
One trend worth noting is the rise of AI, which is generating ripple effects across multiple industries.
The rapid expansion of data infrastructure requires substantial investment in utilities and energy grids to support data centres, positioning utilities as a valuable asset class. Within emerging markets, however, some countries remain vulnerable to geopolitical shifts.
For example, with Donald Trump winning the US elections, countries like Mexico and Vietnam, which rely heavily on exports to the US, will be more exposed to US policies on trade tariffs and agreements compared to South Africa. Yet, South Africa’s unique position presents undervalued opportunities within both the equity and currency markets, making it an exciting time for the country as an emerging market player.
Looking ahead
Despite our challenges, there are reasons for optimism. For the first time in years, emerging markets, including South Africa, are re-entering the spotlight as attractive destinations for foreign capital.
The combination of structural reform, resource availability, and increasing consumer confidence presents a unique opportunity for long-term growth. However, a consistent push towards policy reform and public-private collaboration will be essential for this potential to materialise. The foundation for sustainable growth exists but requires sustained effort to drive meaningful change.
In navigating this complex landscape, Cogence’s balanced approach, merging active and passive strategies with a style-neutral stance, offers a roadmap. By focusing on long-term returns, managing risk, and aligning investments with domestic and global opportunities, we aim to deliver insights that cut through the clutter.
As we look towards 2025, Cogence remains cautiously optimistic, with a steady eye on the evolving opportunities and challenges within South Africa’s market.
Comments