Where South Africa’s richest people are investing their money

South African assets have become increasingly attractive to investors, with fixed-income generating significant returns and local equities well-positioned for future growth. 

However, this does not mean that global equities have lost their appeal. US-listed stocks are likely to continue their strong growth in the coming years. 

This is feedback from Melville Douglas CIO Bernard Drotschie, who outlined the firm’s investment outlook at its recent conference. 

Melville Douglas is a boutique investment management company within the Standard Bank Group that invests funds on behalf of endowments, charities, families, and high-net-worth individuals. 

Drotschie explained that in the past five years, global equity, particularly US stocks, has been the only game in town regarding returns. 

Since 2019, global equities have produced an absolute return of over 70%, and even since the Federal Reserve began hiking rates three years ago, they have returned 28%. 

Drotschie said this is a testament to the age-old wisdom that time in the market beats timing the market and that investors should not sell out of their portfolios on a whim.

This period also saw reasonable returns in South African cash and domestic fixed-income assets, with local government bond yields hovering above 10%. 

Foreign cash and fixed-income assets have been the real laggards over this period, as interest rates were extremely low in developed markets until post-pandemic inflation skyrocketed. 

Drotschie said this trend will likely continue in the coming years but will take a notably different form, with returns no longer generated by a select few tech stocks in the US. 

With interest rates coming down across the board, Drotschie expects the earnings growth in the next few years to be much more broad-based and include consumer staples, retailers, and banks.

Declining interest rates will free up disposable income and result in increased consumer spending. While tech giants will still grow, other sectors may offer better opportunities as they come off a low base. 

This does not mean tech stocks are no longer attractive, with Drotschie saying they deserve higher valuations as they tend to grow faster and are more profitable than traditional companies, enabling them to be more cash-generative than traditional businesses. 

For instance, the tech sector in the US has grown profits by 200% in the past ten years compared to 60% for non-tech stocks. In turn, these tech companies have returned $500 billion to shareholders in the form of dividends and stock buybacks. 

As such, there is no need for investors to greatly reduce their exposure to these companies and this is unlikely to drastically change in the next few years. 

On the other hand, Melville Douglas is increasing its exposure to South African assets and equities in particular as they are attractively valued and set for significant rerating. 

Since the formation of the Government of National Unity (GNU), Drotschie said the firm has become a lot more optimistic about the country’s future. 

He said it cannot be discounted just how bad things could have been if the ANC had not accepted the election results and formed the GNU. 

Crucially, South Africa’s future is no longer dependent on a single political party but rather a broader base of competing forces. 

This not only reduces the country’s vulnerability to a single bad actor but also ensures enhanced accountability and has greatly improved the effectiveness of certain ministries. 

With reform remaining on track and potentially accelerated by the new government, things are looking up for South African equities. 

Drotschie said it is easy to forget just how negative sentiment was towards the country and local assets, with very little needed to move the needle. 

As key hurdles to economic activity are removed and growth picks up, sentiment will follow and create a virtuous cycle. There are still risks to this outlook, with slow progress at Transnet being particularly concerning. 

In the coming months and years, Drotschie expects companies to invest heavily in South Africa as they are sitting on a substantial amount of idle cash and have adopted a wait-and-see approach to the elections in May. 

They have also been engaging in subsistence investing to keep their businesses operational rather than growing their operations. 

Importantly, the National Treasury appears committed to its fiscal consolidation path, which should result in credit rating upgrades in the coming years and reduce the cost of capital in South Africa. 

Prior to South Africa being declared sub-investment grade, government bond yields briefly hovered between 6% and 7% – now they sit around 11%. If this comes down, capital will be freed up to boost the local economy. 

Drotschie also said foreign investors had not returned to the country yet but will turn to South African assets soon as they remain undervalued and are underweight relative to the country’s emerging market peers.

As interest rates and yields come down in developed markets, investors will hunt for returns in emerging markets and South Africa is well-positioned to benefit from the optimism surrounding the government. 

However, Drotschie said foreign investors will wait to see concrete evidence of reforms being implemented and boosting economic activity before increasing their exposure to South African assets significantly.