Since the May election, South African stocks have surged by 13%, significantly outperforming the broader Emerging Markets (EM) index, which gained just 2%. As of September 9th, in total return the South African rand (ZAR) is the 4th best-performing currency globally, according to Bloomberg.
Despite this recent strength, over the past five years, South Africa has underperformed the U.S. equity market by -78% and global equities (MSCI World Index) by -20%. So far in 2024, South African equities (EZA) have lagged behind the S&P 500 ETF (SPY) by -4.11% and the MSCI World ETF (URTH) by -2.43%. However, a strong second half could signal a turning point for south African equities.
The iShares MSCI South Africa ETF (EZA), based in the U.S., tracks the MSCI South Africa 25/50 Index, which consists mainly of stocks traded on the Johannesburg Stock Exchange (JSE). While South African domestic equities have lagged, they are beginning to "catch up" with rising interest rates and may see further gains as rate cuts take effect.
When investing, two key approaches stand out: top-down and bottom-up.
Top-down investing starts by analyzing the bigger economic picture before narrowing down to specific sectors or stocks. In South Africa, for instance, the disappearance of load-shedding and expected consumer spending growth (due to lower interest rates, reduced inflation, and withdrawals from the two-pot system) suggest that South African stocks may be poised for gains over the next 18 months. With the government of national unity holding steady, investors might view South African equities as a promising opportunity in the near term.
Once you’ve identified the broader opportunity, the next step is to decide which sectors to focus on. Retail could be an attractive area, but it's important to consider the different segments—whether it's food, clothing, or home improvement. From here, analyzing sector-specific spending patterns can help you identify individual stocks for deeper evaluation.
Bottom-up investing, on the other hand, focuses on individual companies without considering the broader economy. You start by scanning for stocks based on specific criteria such as dividend yields above 5%, a price-to-earnings (P/E) ratio under 10, a share price within 10% of net asset value (NAV), and consistent revenue and earnings growth over the past three years. This method provides a list of promising stocks that can then be evaluated further.
Recently, many South African banks have met these criteria. If multiple stocks in one sector stand out, it might be worth considering an exchange-traded fund (ETF) that covers the entire sector. An ETF reduces single-stock risk while offering exposure to an undervalued sector. While this approach may limit your ability to pick a standout stock, it provides broader coverage and stability.
South Africa ranks as the 37th largest economy by nominal GDP, placing it ahead of other African nations and underscoring its significance in the global economy. As a member of BRICS, South Africa’s growing economic influence adds to its appeal as a market for investors. However, investing in South Africa comes with both opportunities and risks.
Whether you adopt a top-down or bottom-up approach, conducting thorough research and staying informed about local developments is key. Due diligence and possibly independent financial, legal, and tax advice are crucial to navigating the complexities and risks associated with investing in South Africa.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, an offer, or a recommendation to buy or sell any financial instruments. Investors should seek professional advice tailored to their individual circumstances before making any investment decisions.
