South Africa goes from zero to hero

Although the South African market has been slow in recent years, the country’s investment landscape is shaping up to be one of the most exciting parts of any investor’s 2025 portfolio, with opportunities in equities, bonds, and property.

This is according to Adriaan Pask, chief investment officer at PSG Wealth, who explained that 2024 has been an extraordinary year for the markets. 

“Election years are typically quieter, with market activity slowing ahead of the vote. Since elections often take place late in the year, the shortened window for confident trading and investment usually results in subdued overall activity,” Pask said.

“But 2024 has been an outlier, marking the best election year for the S&P 500 since the 1930s with the index up 25% for the year so far.”

“This performance is particularly striking given the elevated valuations in certain securities and market segments, which made such a strong rally and sustained momentum seem unlikely.”

Asian markets have also been very dynamic this year, with weekly developments coming out of China and turbulence in the Japanese carry trade. 

“Domestically, we anticipated a balanced election outcome, but the formation of a Government of National Unity (GNU), with multiple parties driving reform, was a major surprise,” he said

“Even more unexpected was the smooth aftermath – no social unrest, no significant issues – and strong approval from international investors.”

Investing in unpopular areas can be uncomfortable, but it can also lead to significant returns. This is particularly true for South African assets, which offer attractive opportunities despite current market sentiment.

“We assessed the risks, potential consequences, and probabilities of various outcomes, concluding that markets were likely overpricing bad news. In the end, not only was there no bad news, but there was also considerable good news,” Pask said.

“This highlights two key lessons: first, the importance of following the research, and second, the value of diversification.”

Pask explained that across the board, South African assets have shown strong performance.

“Equities have delivered solid returns, while bond yields have declined in line with the long bond. Listed property companies, though slow to recover from post-Covid losses, have also performed well,” he said.

With interest rate cuts, the property market is expected to perform well next year, too, as new homebuyers enter the market and as current owners experience some relief from their mortgage repayments. 

“Similarly, our banks and local retailers have shown strong performance.”

Not only have South Africa’s established banks fared well, but many new entrants have entered the market as the fintech space and digital banks continue to gain popularity. 

However, Pask cautioned that there are still risks to consider going into 2025. “Global government debt, the risk of inflation and excessive asset valuations will be challenges going forward.”

US government debt levels have created a headwind by borrowing heavily against future growth.

“Taking on debt is essentially a bet that growth will outpace the rise in debt costs. If that growth fails to materialise, escalating debt and funding costs can become a significant burden,” Pask explained.

He noted that persistent inflation also raises concerns, particularly regarding its long-term impact on US government financing costs. 

“With interest rates remaining elevated, the government’s annual interest bill on bond issuance now exceeds $1 trillion. This burden falls on taxpayers, diverting funds from productive economic investments that could drive growth.”

“Valuation risk in the US has been a concern for some time, even as the market continues to surge, seemingly detached from fundamentals. The reality is that current market behaviour shows clear signs of excessive speculation.” 

This is driven by retail investors and speculators, with unusual investments like obscure cryptocurrencies and leveraged ETFs gaining popularity.

“This abundance of speculative capital suggests too much money is circulating, creating conditions that often precede trouble.”

The rapid growth of private markets may be adding to the current dynamics, he said. 

“Many private equity firms, flush with capital, now face significant reinvestment risk. As their earlier investments mature, they are pressured to deploy capital, often into lower-quality opportunities with near-term challenges.” 

“This cycle of forced reinvestment into suboptimal assets is a key concern moving forward.”

Looking ahead to 2025, Pask said South African equities are a broad area of opportunity. 

“Currently, share prices are catching up to earnings after prolonged pressure, particularly within the banking sector, though not universally. Even the bond market offers potential, with room for yields to decline further,” he said.

“Much will depend on the upcoming National Budget Speech in February, and we remain hopeful it avoids any shocks that could unsettle rating agencies.”

“We’re not broadly negative on the offshore environment but remain focused on the US.”

While China has potential, it’s essential to carefully consider the risks and potential returns before investing there.

“The UK, however, stands out as an overlooked space. Like South Africa, retail investors have shifted capital toward the US, chasing its recent returns.” 

“As the cycle turns and investors reassess valuations more rationally, we expect some of that capital to flow back, unlocking potential opportunities in the UK market.”

Ultimately, Pask said that he is far less concerned than he was this time last year.

“While some risks remain, they’ve clearly decelerated, significantly reducing the probability of a negative outcome.”

Conditions have improved substantially from a risk perspective, and from a return perspective, there’s still meaningful upside. 

Overall, we’re in a much better position, which is encouraging, he added. 

“Having said this, the South African market is the most exciting part of the portfolio right now.” 

“The rand still has room to recover, and with the dollar remaining strong, offshore holdings are slightly less attractive in the near term, as a stronger rand could erode returns.”

“Patience will be key for offshore investments, but for now, South Africa offers a promising investment landscape.”