Making money on the JSE – even when South Africa struggles

Coronation fund manager Alistair Lea says that despite South Africa’s struggling economy, many local businesses have demonstrated resilience and good business sense.

South Africa’s economy is expected to grow by only 1.1% in 2023, not enough to address problems like unemployment and increased poverty.

BNP Paribas South Africa senior economist Jeff Schultz has an even worse outlook, predicting below-consensus 0.2% GDP growth for 2023.

He said the energy supply crunch and rail and port logistics problems would prevent any meaningful economic growth.

With this gloomy outlook, many investors are sceptical of investing in local shares, especially those exposed to the South African economy.

Lea is more optimistic, saying there are many attractively valued shares in the small- and mid-cap space in South Africa.

Coronation’s Smaller Companies Fund has been able to keep pace with the JSE Top 20 and the ALSI over most periods for the past ten years.

“Just because South Africa is a difficult environment to operate a business, it doesn’t mean one can’t still make reasonable investments,” Lea said.

“The difficult environment often means that shares trade on very low multiples and, if the business is well run or the business environment improves marginally, the rating on the business can improve.”

Lea highlighted that re-rating from a five to a seven price-to-earnings ratio translates into a 40% return.

The inverse holds for international stocks. “Just because it’s a big global business doesn’t mean it has no risks attached or is a good investment,” he said.

The exciting prospect for investors over the next few years is that many South African companies have been able to grow earnings ahead of our overall economy.

Many of these good companies are very modestly rated by the market, as shown in the table below.

“We urge investors not to write off pure SA-focused funds or investment opportunities. They might surprise you,” Lea said.