The election outcome was better than most expected and SA equities are undervalued. From Moneyweb.
The JSE All Share index is up more than 7% for the year so far, most of that coming in the last two months as it became clear SA would be ruled by a government of national unity (GNU) following the elections in May.
That was a better-than-expected outcome, with most analysts forecasting a roughly 45% vote for the ruling ANC. In the end it got about 40%, pushing it into a GNU with mostly business-friendly parties such as the Democratic Alliance and IFP.
That prompted a shift in sentiment towards SA, reflected in the one-and-a-half percentage point rerating in 10-year bonds in recent months, with the JSE All Share index breaking new highs.
“There hasn’t been an easier to time to generate inflation-beating returns,” said Anchor Capital CEO Peter Armitage at an investor briefing on Tuesday.
Joint chief investment officer at Anchor capital, Nolan Wapenaar, drew a comparison between the elections in SA and Brazil, with the latter enjoying a sharp market rerating following the election of Lula da Silva in 2022. Brazilian equities are up nearly 20% since the start of 2023, when Lula assumed office.
BHP move bumps up interest
The SA market got an unexpected bump in the second quarter of 2024 with BHP’s bid to buy out Anglo American, a deal that was subsequently abandoned. That focused international attention on SA equities, which are seen as cheap relative to other parts of the world, said Liam Hechter, fund manager at Anchor.
The outlook for the SA economy is far brighter than was the case going into the elections, he added. “We are going to stay the course on SA equities. From now we are going to give SA the benefit of the doubt. The reality is that SA ratings are still depressed.”
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A few other factors are lining up in favour of the local economy: days without load shedding has hit 110 days; interest rates are expected to start falling later in the year and into 2025; and the introduction of the two-pot retirement system, which allows South Africans to access a portion of their savings before retirement, will help boost consumer spending.
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SA’s inflation and interest rate path in an emerging market context
Eye-watering taxes await those who withdraw funds under two-pot
That should translate into higher earnings growth, powering the next leg of the equity market cycle.
Where to look?
As to where the money is likely to be made over the balance of 2024, Hechter says the strategy is to remain invested in high quality, dependable large cap stocks. Anchor Capital has set up a team dedicated to exploring opportunities in mid-cap stocks. Such as Famous Brands.
Among the specific stocks looking appealing are local banks, Clicks, Shoprite and Naspers.
Sectors that are starting to show promise include domestic banks, retail and industrial.
Read: Best and worst shares since January
Following the recent move up in local equities, the market is likely to tread water for a period. Foreigners investors have yet to return in large numbers, and there are large SA-based funds with massive offshore allocations that could start to rotate assets back into the local market.
New government
It remains to be seen how the GNU works out in practice, but for the first time the ANC has had to share 18 ministerial or deputy ministerial positions with opposition parties.
That alone should promote transparency and better governance than we have seen in the past, said Wapenaar.
One major headache for the government is SA’s escalating debt, which has grown 6.83 times since 2009 compared to GDP which is up just 2.5 times over the same period.
This is not dissimilar to the situation in Kenya, where the government faced riots after attempting to introduce higher taxes and other austerity measures.
Growth
“The only way out is to grow [the] economy,” said Wapenaar. “We’ve gone 110 days since we last had load shedding, yet haven’t seen economy bounce back.”
The economy is still limping along at growth rates less than 1%, and it has become apparent that fixing SA is about more than just fixing Eskom. SA ports rank among the worst in the world, but there are signs of a turnaround here.
There’s also positive news coming from newly-installed Minister of Home Affairs Leon Schreiber about making it easier for visitors to get visas to SA.
Read: SA extends temporary visa concession for applications
Getting some of the structural problems sorted out should allow the economy to start growing faster.
Global equities
Global equities are richly priced at 21 times earnings, and though US earnings are expected to average about 13% in 2025, the markets “are priced for perfection,” according to Anchor. We are now approaching the highest valuation in 15 years.
A handful of mega-cap tech stocks are driving most of the growth in global equity returns, with Nvidia up 745% since the start of 2023 – mostly due to its outsized role in supplying computer chips for AI development.
Demand for AI processing power at data centres is at the heart of Nvidia’s explosive growth. Analysts expect the company to continue growing profits and investors seem willing to snap up shares, even at current high prices.