Top asset manager shuns South African stocks

Morningstar is steering clear of South African stocks in its global portfolios as relatively weak economic growth overshadows cheap valuations.

That contrasts with the $375 billion asset manager’s overweight stance on emerging markets, with Brazil and Mexico its top picks outside of Asia, said Sean Neethling, the firm’s South African investment head.

The FTSE/JSE All Share Index has declined more than 4% in dollar terms this year and is poised for its first annual drop since 2022.

That compares with a 21% rally for the MSCI emerging-markets equity gauge, which has been propelled mostly by gains for Asian artificial intelligence-related firms.

Johannesburg has missed out on global fund flows due to lacklustre economic growth and its dearth of exposure to the AI boom, according to Neethling, who oversees about R60 billion in rand- and dollar-based portfolios.

“If you look at South Africa at a company-specific level, there’s not many companies that are at the forefront of what’s driving markets right now in artificial intelligence and tech,” Neethling said in an interview.

“South Africa doesn’t have that growth factor that a lot of other emerging markets have right now.”

Africa’s biggest economy has expanded by less than 1% annually for over a decade, and the US-Iran war fallout is weighing on manufacturing, trade and mining output.

The South African Reserve Bank raised borrowing costs for the second time this year earlier this month, further straining the economy.

South Africa’s stock-market gains over the past year have been driven by gold and platinum producers, which have lost ground as metal prices pulled back.

By contrast, Brazil has large firms like Petrobras and Vale S.A. that are linked to different parts of the commodity cycle, as well as well-capitalised banks, Neethling said.

Mexico offers an “industrial-staples mix” with robust companies such as the bottler Coca-Cola Femsa, he said.

China is Morningstar’s strongest investment conviction in emerging markets, and South Korea is another top bet.

The Korean stock market, which has fallen 24% from its June 22 high, is now “attractively priced,” Neethling said.

While foreign buyers may be wary, South African assets do offer value for rand-based investors, Neethling said.

Morningstar is overweight on the nation’s bonds, which have attractive yields relative to emerging-market peers and developed-market debt.

“For rand-based investors, South Africa offers really attractive and compelling value, particularly in the bond market, where absolute yields and yields to maturity are among the most attractive in emerging markets, only second to Brazil,” Neethling said.