South Africa’s weak economy hides investment gems – PSG Asset Management

South Africa’s moribund economy does not necessarily mean that there are no good investment opportunities, and there are still pockets of growth in the country.

This is according to PSG Asset Management fund manager Mikhail Motala, who said many investors conflate the issue of the prevailing economic environment with that of stock market returns. 

“As with many things, however, the reality is often more complex,” he said. “The broader economic context undoubtedly deserves consideration, but it should, in our view, only be one part of the stock selection process.”

The opportunity for stock pickers lies in understanding when the economy becomes a prohibitive factor to investment and when there are aspects the market might overlook due to its reliance on the popular narrative. 

“While these issues may seem less important during times of buoyant economic growth as the tide ‘lifts all boats’, we believe that they become very salient in a growth-constrained environment like the current one locally,” he said.

Motala said that while a focus on headline factors may create the impression that the economy is one homogenous entity, this is not the case. 

He said it is possible to see pockets of growth within a depressed economic environment. 

A recent local example is the boom seen in the travel and tourism sector after the Covid-19 pandemic, as pent-up demand was released. 

This has translated into exceptional revenue growth from companies that operate in these sectors, even as the South African economy has broadly languished.

Source: Bloomberg. *WBHO refers to South African revenue only.

“A tough economic climate undoubtedly presents a challenge to management – and this is precisely what gives stock pickers the edge,” Motala explained. 

“Tough economic conditions often lead to the demise of poorly managed companies, creating supply and demand imbalances as the competition falls away.” 

He used the example of South Africa’s construction industry. 

In 2011, eight large, listed construction companies shared the revenue ‘pie’. While the size of the pie has shrunk, it is now divided between only two listed companies: WBHO and Raubex.

Due to this, construction industry capacity has fallen by 60% over the last decade.


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