Good news for South African investors

Despite high market volatility and uncertainty, there are ways for South African investors to win big and show a good return on investment.

PSG Asset Management fund manager Dirk Jooste explained that the markets have not seen such large and unexpected moves since the Covid-19 pandemic.

“Interruptions or apparent reversals of previous market trends seem to be following in short succession,” he explained.

“Times like these can be exhausting, as investors have to navigate the cacophony of market noise while sorting false signals from those that could indicate a genuine change in the underlying long-term market outlook.” 

Jooste said that, amidst this uncertainty, the challenge for local investors remains no less urgent – maintaining and building wealth in a way that reliably outpaces inflation.

He explained that South Africa’s markets are not isolated from developments in the rest of the world, and global market movements will impact local equities and bonds. 

However, investors can feel better about the fact that the relative starting point and initial price paid for an asset matter a great deal. 

While Jooste emphasised that international diversification remains important, he believes that select local equities still offer potential for further upside following the formation of the Government of National Unity.

“Even a mild improvement in local trading conditions – be that from lower interest rates, a continued abatement of load-shedding, mild improvement at ports or a combination of these – could improve the earnings for local companies,” he said. 

Specifically, he highlighted that the companies most likely to benefit from such improvements are the true ‘SA Inc.’ and medium capitalisation stocks.

This is as opposed to large index components which have already benefited from the rotation into South African assets. 

Another factor working in local stocks’ favour is investors’ move away from the so-called ‘TINA’ mindset. In other words, they no longer believe there is no alternative to US equities and the Magnificent 7 stocks.

In fact, investors seem to have shifted to an ‘anywhere-but-America’ mindset. Therefore, Jooste said it is important to consider the possibility of global investors returning to the JSE in support of equities. 

“Such a reversal in trend could lend further support to local asset prices, even as risks remain,” he said.

Beyond equities

Regardless of the upside potential in some local equities, Jooste said he also believes there will be substantial opportunity costs for investors who opt to hold cash out of fear. 

“The returns on offer from local fixed income assets are well in excess of those available from cash and well ahead of current inflation rates, which we expect to remain contained for 2025,” he said. 

“While inflation protection must be sought from equities in the long run, especially given the prospect of higher inflation rates for longer, there are currently high real yields available to local fixed income investors.” 

For example, he pointed out that local bonds are currently offering nominal yields of around 10% to 11%, which translates into real yields of around 6%. 

This is well in excess of their long-run average of between 2% to 3%. 

In addition, negotiable certificates of deposit (NCDs) and high-quality credit also offer nominal rates of between 8.5% and 9% for the year. 

“We anticipate that listed property, which is sometimes included in multi-asset income portfolios, will likely have a more tempered year from a return perspective compared to 2024, given the potential for a shallower rate cutting cycle, but they too offer the prospect of real returns,” he said.

However, while Jooste is positive about the returns on offer from local fixed-income markets, he remains highly cognisant of the valuable lessons last year offered. 

For example, the FTSE/JSE All Bond Index delivered a phenomenal return for 2024 in excess of 17% but saw negative returns in four months, with large negative monthly returns in March and October as global interest rate expectations started to change. 

“Thus, while we believe fixed-income markets are still positioned to deliver good real returns to investors, the return path will not be smooth,” he said. 

“From a broader perspective, it should also be clear that there are upward risks to the global inflation outlook and that policy uncertainty has increased.” 

“While equities – both local and global – remain important in constructing a well-diversified portfolio, especially for investors with a longer investment horizon, returns are likely to be very volatile in 2025.” 

Amidst this uncertainty, he said local investors are in a privileged position where they can still look forward to real returns of 6% on offer from the local bond markets.

South African investors can use this element to help secure positive returns in what may otherwise be a trying year.

The graph below, courtesy of PSG Asset Management, shows the attractive yields embedded in local government bonds.