South Africa bouncing back 

South African assets have performed well over the past few months, indicating renewed investor confidence in the country, which can translate into broader economic growth. 

Local assets have come under immense pressure in recent years as the government struggled to deliver on its reform agenda and improve economic growth. 

Foreign investors dumped South African stocks and bonds, weakening the local currency and reducing the pool of capital available to fund growth in the country. 

South Africa was generally seen as a country on a path to nowhere, with the government kicking the can down the road regarding vital reforms and load-shedding getting steadily worse. 

However, sentiment towards South African investments has significantly shifted since the end of the election in May. 

The more business-friendly coalition government, coupled with a prolonged period without load-shedding, has made local assets more attractive to foreign and local investors. 

This has resulted in an opportunity for the country to enter into a virtuous cycle where improved investor sentiment results in faster economic growth, which encourages further investment. 

Stanlib chief economist Kevin Lings said the country has the potential to meaningfully improve its growth rate over the next 18 months, significantly boosting investment in local assets. 

If the country can reach a growth rate of 3%, the entire investment landscape would change.

Standard Bank CEO Sim Tshabalala echoed this sentiment, telling Daily Investor that the bank’s research shows that 81% of foreign investors are positive about the country’s new government. 

95% of the investors surveyed said they are planning to or considering increasing their investments in South Africa in the next few years. 

“As the government continues to execute its structural reforms, business confidence will improve and investment will follow. This will have a positive impact on GDP, and we will support it.” 

The improved investor confidence in South Africa can be seen in the graph below, showing a decline in long-term bond yields and a stronger currency as investors pump money into the country.

There are fears that this may only result from a relief rally, with assets appreciating off a low base due to South Africa avoiding the creation of a coalition less friendly towards business. 

Old Mutual Wealth investment strategist Izak Odendaal said this is not the case, as there is still plenty of juice left in the tank. 

Odendaal explained that valuation remains on the side of South African assets and any improvement in the country’s economic fundamentals can unlock the underlying value. 

In particular, the catalyst for future appreciation is likely to be on the back of lower inflation, interest rate cuts, rising business confidence, and no load-shedding. 

“We’ve already seen growth forecasts by major banks being upgraded in recent months. Future upgrades should provide fresh impetus to local market valuations,” he said. 

“It is always natural to anchor off the lows, which will make current levels seem very high when they are not.”

For example, compared to a level of almost R20 to the dollar in May last year, the end-August close of R17.76 seems very strong. 

But not that long ago, in August 2022, the rand traded between R14 and R15 to the dollar, around 20% stronger than today.

Similarly, despite the rally in South African bonds this year, the All Bond Index has not returned to pre-Covid levels. Of the 12% year-to-date return, 5% was due to higher bond prices, with the remainder being interest income. 

Local assets and economic growth are expected to get another boost in the coming months from interest rate cuts. 

Odendaal said the path is clear for the Reserve Bank to enter a cutting cycle, with inflation falling faster than expected and the rand proving resilient. 

Lower interest rates will boost consumer spending by freeing up disposable income to be spent outside of debt repayments. In turn, this should boost corporate earnings.  

As the majority of South Africa’s GDP is driven by consumer spending, this will have an impact on economic growth. 

This will, in turn, improve the government’s finances by increasing tax collection and improving its debt-to-GDP ration. 

Odendaal said this will mean investors should demand a smaller premium for lending to the South African government. 

This translates to somewhat lower bond yields, all else equal, which further reduces the debt burden and lowers borrowing costs in the private sector, potentially further stimulating the economy.

On the JSE, the big winners have also been the interest rate-sensitive sectors, including banks, life insurers, retailers and listed property.