Old Mutual warns South African investors riding GNU wave

South Africa needs to attract renewed interest from foreign investors to sustain the rally experienced by local assets following the formation of the Government of National Unity (GNU).

To do this, the country needs to provide investors with evidence that its new government is driving structural reforms in key sectors of the economy and has the potential to last until the next election. 

Jason Swartz, portfolio manager at Old Mutual, said foreign investors are still waiting to see what happens in local markets. 

Besides the last few weeks of heightened volatility, JSE-listed equities have recently been on a ‘tear’ as positive domestic news flows and local investor sentiment push share prices higher. 

Despite this strong showing, South Africa is experiencing an underwhelming show of foreign confidence as foreign investors are still exiting the market. 

Around R95 billion worth of foreign capital has left the country year-to-date. While this flow is somewhat distorted by the inclusion of dual-listed shares, adjusting for this anomaly still suggests a lack of interest by foreigners in our market. 

This is also despite local equities having weathered recent global market upheavals better than many of its peers.

For the pendulum to truly shift on foreign investor sentiment, there needs to be more movement around improved performance from state-owned enterprises (SOEs), alongside a stable centrist GNU, and sound policymaking.

Swartz explained that as the final quarter of 2024 looms, domestic financial markets seem caught between two forces. 

On one front, investors have found hope in the South African story thanks to a 175-day-long and counting hiatus in Eskom’s load-shedding intervention and a mostly positive political outcome following the 2024 National Elections. 

This upbeat sentiment has been reinforced by some local asset managers reining in some of their offshore exposure in favour of onshore exposure due to concerns of global instability and excessive valuations in the US.

Equities in the US and other developed markets experienced a tumultuous July and August 2024 as markets processed a number of weaker-than-expected data points. 

One of the biggest concerns centres on the global ‘soft landing’ narrative and the increasing likelihood that the US will enter a recession.

For SA-focused managers, the best protection against such scenarios is to position cautiously. 

The good news for local investors is that both bond and equity markets – and the rand – are showing resilience in the face of recent global market turmoil. 

Swartz explained that getting foreign investment into South Africa is vital because local asset managers are already nearly at capacity in local assets. 

Many have been heavily investing in JSE-listed equities and bonds in recent years, picking up the slack left by foreigners as they searched elsewhere for returns. 

Within the dual context of regulation 28 and local fund managers’ value bias, local investors are unlikely to maintain local asset classes at pre-Covid heights based on local improving sentiment alone. 

The game changer is for improving foreign investor sentiment and their return to domestic markets. 

“We need foreigners to step back in to introduce the levels of liquidity necessary to take the JSE to the next level,” Swartz urged. 

Despite the recent re-rating, South African assets remain undervalued and present opportunities for investors all over the world. 

It is hoped that improved investor sentiment will unlock more value in asset classes through the final quarter of 2024. However, this value unlock will also depend hugely on clear signs of local economic reform. 

Old Mutual’s portfolios are currently overweight South African equities and local bonds, reflecting its optimism about the short-term risk-return improvements stemming from the political landscape. 

With more centrists in government and growth-enhancing, reform-focused policies, Old Mutual is optimistic that the value unlock will gain momentum.

There are also a few ‘tailwinds’ that could insulate domestic asset classes from recession, including higher GDP growth outlook, interest rate cuts, and Eskom’s turnaround.

If these improvements persist, then South Africa could once again find a place in global investors’ emerging market portfolios. 

Local financial markets also have the potential to shrug off the ‘liquid proxy for emerging markets’ tag and emerge as good growth story in their own right.