Making money in South Africa despite chaos

Adriaan Pask, CIO at PSG Wealth, said South Africa offers good long-term investment prospects despite the chaos in the country.

News headlines on load-shedding, corruption, labour disputes, damaged infrastructure, and unemployment scare many investors.

South Africa’s challenges prompt them to look elsewhere for returns, but foreign markets are also struggling.

Developed markets are grappling with rising interest rates and large debt burdens. It means that future growth could be challenging because debts will need to be repaid.

South Africa, with a debt-to-GDP ratio of around 70%, is still relatively good compared to global standards.

Global debt numbers have escalated significantly since Covid. For example, the United States (US) is heading towards 140% debt-to-GDP, and inflation rates are hovering around the 8% mark.

Pask added that South African professional investors are better equipped to navigate an inflationary environment than their global counterparts.

“This is not the first time that we’ve seen inflation at these levels – and it is unlikely to be the last,” he said.

South Africa has also seen a commodity boom over the last few years, which has had positive tailwinds for our economy and fiscus.

“Our current account is in fantastic shape as a result. Compare this to the US, where the current account has been slipping consistently for a very long time,” he said.

On a relative basis, the gap between South Africa and the US as an investment destination is less significant than people think.

“If we then look at the returns that can be generated from South African assets, one can really start to see the case for investment locally,” Pask said.

It’s quite easy to generate a 6% yield on cash investments in South Africa, and interest rates are still rising.

Local bonds yield around 10% to 11%, which is extremely attractive. Valuations on our equities are at single-digit levels, and dividend yields are more than 4%.

“Importantly, our profit margins are very sound. There’s a high component of commodity-company profitability in there, but our margins are higher than those of US companies at present,” he said.

“The earnings yield from South African companies is almost double what you would receive out of the US on aggregate.”

He highlighted that there is still merit in diversifying offshore. However, looking at individual securities on a risk-adjusted basis is important.

Offshore investments provide South African investors with two key benefits.

• Access to a broader range of investment opportunities, particularly from a return perspective.
• Diversification.

The diversification benefit overtook the return-prospect benefit in recent times.

“The reality is that all around the globe, there are issues. South Africa is not risk-free by any means, but it seems like global risks are starting to become more prominent as interest rates rise,” he said.

“Bearing this in mind, local might indeed be more attractive over the long-term.”