Best news for South African investors in over a decade

South African equities are on track for their longest monthly winning streak since early 2013, buoyed by optimism around the domestic economy, expectations of global monetary easing, and renewed appetite for emerging-market assets.

The benchmark FTSE/JSE Africa All Share Index is up 1.5% in October, on course to rise for an eighth month. Banking, technology and telecommunications shares have led the advance, catching up with surging precious-metals stocks, amid undemanding valuations and improving sentiment toward the country.

“Macro-economic optimism as well as a rotation into emerging markets are driving gains,” said Lester Davids, analyst at Unum Capital.

“Local-facing stocks have begun to pick up, possibly driven by attractive valuations relative to global peers.”

South African stocks are part of a sustained rally in emerging markets, with the devloping nation benchmark index set for a 10th monthly gain, the longest such sequence since 2004.

The latest boost has come from the perceived easing of tariff frictions after a flurry of trade deals and a truce between China and the US. 

South Africa’s removal a week ago from a watchdog’s dirty-money list provides a further boost, Davids said. The Paris-based Financial Action Task Force on 24 October said South Africa was among countries no longer on the list of jurisdictions subject to increased monitoring, after their governments stepped up efforts to combat money laundering and terrorist financing. 

South African banking stocks have attracted buyers thanks to high dividend yields and relatively low price-to-earnings ratios, while technology investor Prosus and its parent Naspers have benefited from a rebound in Chinese tech stocks, said Davids.

MTN has jumped about 20% this month as Africa’s largest wireless carrier benefits from rising earnings in markets like Nigeria and Ghana.

Peter Takaendesa, portfolio manager at Mergence Investment Managers, said gains in South African stocks reflect some rotation from resources into banks and telecommunications, supported by company earnings growth, falling borrowing costs and reduced trariff tensions. 

“Recent global developments such as trade war de-escalation, a weaker US dollar and further monetary easing by central banks are surely helping the case for South Africa and other emerging markets,” he said.

While banks remain attractive thanks to their earnings outlook and dividend yields, apparel retailers and domestic industrials have lagged behind because of lingering concerns over the economy.

“We think their time will come and the market will broaden out at some stage, especially when the precious metals sectors take a breather,” he said.

A Johannesburg index of precious-metals and mining shares is the worst-performing sector this month, falling more than 6% as gold prices retreat from all-time highs. 

Bullion is down around 9% from its record high above $4,380 an ounce on Oct. 20 as traders temper their expectations of further Federal Reserve rate cut and due to outflows from gold-backed exchange-traded funds.

There are some lingering threats to the positive picture for South African equities, with Unum’s Davids cautioning that global policy uncertainty, including the Fed’s rate-cut path and worries about persistent inflation could spark a risk-off shift. The benchmark stock index was 0.2% lower on Friday, falling for a second day.