South Africa’s new dawn is here

South Africa’s outlook for 2025 and beyond is significantly better than at the beginning of 2024, with hopes of a resurgent economy and greater foreign investment buoying sentiment. 

At the beginning of 2024, investors and economists were deeply concerned about the trajectory of South Africa’s economy.

The country’s economy had stagnated for over a decade, with annual growth averaging less than 1%. This translates into a looming financial crisis, with government debt rising without a corresponding increase in economic growth. 

South Africa’s days were also dark, with 250 days of load-shedding in 2023 and no sign of improvement at the beginning of 2024. 

The country was added to the Financial Action Task Force’s (FATF’s) grey list of countries, which is not a good company to keep and had many ramifications. 

Adding to this was the negative foreign sentiment towards South African assets, resulting in foreign ownership of our equity market at levels last seen in 1998 and no appetite for local bonds. 

The rand was trading around R19.30 at the beginning of the year, and given that the country imports most of our inflation, a weak rand directly impacted us as consumers.

After a prolonged period of poor economic growth, a weak rand, higher-than-usual inflation, and a rising interest rate environment, the cost of living crisis for South Africans was real.

Investors were also deeply concerned about the country’s elections at the end of May, with widespread fears over a left-leaning government that would sideline the private sector. 

Globally, interest rates and inflation were also at multi-year highs, and investors were concerned that inflation could remain structurally high and that elevated interest rates were not working.

Geopolitical tension was also ratcheting up, with ongoing conflicts in the Middle East and Ukraine threatening to disrupt supply chains. 

However, Managing Director at Morningstar Investment Management, Victoria Reuvers, said that things look remarkably different as South Africa enters 2025.  

Inflation globally appears to be under control, and central banks around the world, including the Reserve Bank, have started to cut interest rates. 

Lower interest rates are good for equity markets and bond markets, but more importantly, they are good for every South African, as lower interest rates and lower inflation help ease the cost of living crisis, Reuvers said. 

At the time of writing, South Africa has not had load-shedding since 25 March, and this has had a significant impact on both productivity and sentiment. 

This improvement in load-shedding has not even filtered through to business earnings yet, but there is likely to be an uptick in both company earnings and GDP growth.

The rand is trading around R18/$, and inflation is well below the 6% level and is set to hover close to the bottom of the Reserve Bank’s target range for inflation. This means an environment with lower interest rates, which ultimately benefits consumers.

South Africa’s general elections were not only fair but accepted, with a peaceful transition of power from a ruling party that has had the majority for 30 years to a Government of National Unity (GNU). 

There has also been a colossal effort from the FIC and FSCA to ensure processes and procedures are in place to hopefully remove the country from the grey list in 2025.

All of the above have been drivers of the rally we have seen in domestic assets over the past 6 months. 

Where to invest

Given the abovementioned changes, Reuvers said Morningstar sees clear opportunities in local equities and bonds. 

The investment manager favours companies that are geared to the South African economy, so-called “SA Inc” companies. These businesses have benefitted tremendously from improved sentiment in the past year. 

Any South African-focused business that has managed to survive has not only demonstrated resilience but also a business model that can be sustained in an environment of low growth and real headwinds, Reuvers said.  

As the environment shifts and becomes more favourable, Morningstar thinks this area of the market is poised to capitalise on these changes and generate good returns for investors.

Despite the rally in local bonds, Reuvers said it continues to be a favourite across portfolios holding a dedicated position in debt. 

With inflation around 3.8% and bond yields around 9.4%, the asset class is offering real returns after inflation of 5%, and in a rate-cutting environment, investors will be rewarded not only with higher yields but also possible capital gains.

Morningstar remains neutral with regard to its global exposure in our multi-asset regulation 28 compliant portfolios. 

While the Rand may be relatively stronger against the US dollar today than a year ago, we try not to time the exchange rate.

Our research has shown that the returns from underlying global investment opportunities have outweighed the rand’s contribution to performance over time.

It is important to note that South Africa is less than 1% of the global GDP, so it makes sense to have healthy exposure to industries and investments outside of South Africa over time. 

Emerging markets are a relatively diverse group of countries and regions, and Morningstar is seeing a fair amount of disparity. 

Chinese and Korean equities stand out as two investable opportunities that we have added to our more aggressive portfolios.

Chinese equity markets have recently benefitted from increased government stimulus to support the slowing economy. For the rally to have meaningful staying power, it must be accompanied by earnings growth. 

Turning to the US, an expensive market became more expensive thanks to the Trump rally. However, within the US market, there are some great pockets of opportunity that we have tactically allocated exposure to. 

These include the more defensive Healthcare, Financials and Consumer Staples sectors and more opportunistic Telecoms exposure where Meta and Alphabet are large index constituents. 

More recently, we have also added positions to smaller US companies that are trading at multi-decade lows relative to their large-cap peers and have historically benefitted from a falling interest rate environment.