Best news for South African investors in a decade

The valuation discount of South African equities relative to developing peers is set to narrow as some of the capital flowing out of the US and into emerging markets finds its way to Johannesburg stocks, according to Momentum Investments.

Foreign investors have been net sellers of South African stocks every year since 2016, and net outflows year-to-date already amount to $6.3 billion, according to JSE data.

Even so, the benchmark FTSE/JSE Africa All Share Index outperforms the MSCI Emerging Market stock index and the S&P 500 in dollar terms this year.

Provided the local political backdrop remains stable and foreign investors start showing more interest, Johannesburg stocks could continue to outperform, said Herman van Papendorp, chief of asset allocation at Momentum Investments, a unit of Momentum, a South African insurer which oversees R743 billion.

That would help close the value gap with peers, he said.

The Johannesburg benchmark trades at an estimated forward price-earnings ratio of 10, compared with 12.5 for the MSCI EM Index. The 10-year average for the South African gauge is around 12.

“The valuation gap is still enormous,” Van Papendorp said in an interview. “We’re trading roughly one standard deviation cheap relative to our long-term average compared to EM, and that discount hasn’t recovered since Covid.” 

Now, a structural shift is underway, with global investors beginning to reassess their heavy exposure to US assets, Van Papendorp said.

The trend is being amplified by political risks in the US and the strong-dollar environment giving way to potential weakness for the greenback, he said.

“We’re seeing a disconnect between the US and the rest of the world, and if this continues, capital could start flowing into emerging markets, including South Africa,” he said.

Momentum sees opportunity in South African bonds as well as equities, Van Papendorp said. “Both asset classes will benefit from global flow,s but with the equity market still so cheap, I’d expect equities to outperform bonds over the next few years.”

However, Van Papendorp cautions that political stability will be key to unlocking foreign inflows. A months-long dispute over the annual budget which brought the coalition government close to collapse had investors on edge earlier this year, with the rand weakening, stocks falling and bond yields rising.

Those moves turned around after parties in the so-called Government of National Unity agreed on a spending plan.

“If the Government of National Unity holds, then the outlook is supportive, but if it collapses, risk premia will rise and valuations could remain depressed,” Van Papendorp said.