South Africa’s Asset Rally Faces Challenges Amid Economic Growth Concerns

The rally across South African assets is experiencing significant momentum this year, but analysts warn that it could lose steam unless the country’s economic growth improves. Stocks, bonds, and the rand have all surged, propelled by rising commodity prices and recent government reforms. As of October 2023, the benchmark equity index has risen by approximately 46% in dollar terms, while local-currency government debt has returned more than double the emerging-market average. The rand is on track for its strongest performance against the dollar since 2022.

Despite these gains, experts caution against assuming that the upward trajectory will continue into 2026. According to Hendrik du Toit, Chief Executive of Ninety One Plc, which manages around 3.5 trillion rand (approximately $202 billion), the primary concern remains job creation. “Without it, you simply will not sustain momentum,” he stated. With nearly a third of South Africa’s working-age population unemployed and gross domestic product (GDP) growth struggling to surpass 1%, businesses may find it challenging to generate the profits necessary to justify current stock valuations.

Government Actions and Market Reactions

Earlier this month, South Africa’s Finance Minister, Enoch Godongwana, provided a more optimistic budget update, revealing that revenue had surpassed previous expectations and reaffirming the government’s commitment to fiscal consolidation. This has led to a credit rating upgrade from S&P Global Ratings, the first of its kind since 2005. Additionally, power disruptions have largely ceased, and the coalition government is actively addressing logistical challenges that have historically hindered exports.

Despite the improvements, South Africa’s GDP has expanded by an average of less than 1% annually over the past decade, and the unemployment rate remains stubbornly above 30%. The National Treasury anticipates an average growth rate of 1.8% over the next three years, but investors remain wary, emphasizing the need for structural reforms that facilitate job creation. At the Bloomberg Africa Business Summit, Daniel Pinto, Vice Chairman of JPMorgan Chase & Co., stressed the importance of deepening reforms to stimulate economic activity.

Prospects for Continued Growth

The FTSE/JSE Africa All Share Index is poised for its strongest annual performance since 2006, outperforming both emerging-market benchmarks and major global indices. This growth has been largely driven by rising prices of gold, silver, and platinum, which have boosted the index of precious-metals miners by over 180%. A recent survey by Bank of America Corp. revealed that 75% of fund managers are optimistic about South African equities, suggesting that sectors such as banking and retail could lead future rallies, provided government reforms unlock economic potential.

Du Toit acknowledged the significant role of the financial sector, stating, “Finance is very big here and continues to do well, but finance can only prosper if the economy comes through.” He estimates that South African companies possess around $100 billion in potential investment that could be unleashed through regulatory reform.

The bond market has also benefitted from lower interest rates, moderating inflation, and fiscal discipline. Government rand bonds have yielded returns of approximately 32% in dollar terms this year, far exceeding the 15% return of a Bloomberg country-capped index of local-currency debt. Foreign investors are increasingly drawn to the South African market, with net inflows reaching 175 billion rand in 2023, compared to 73 billion rand the previous year.

Despite these positive trends, some analysts caution that gains may become harder to achieve. As yields on 10-year government bonds have dropped significantly—over 170 basis points this year—valuations have become relatively expensive compared to historical standards. David Austerweil, an emerging-markets deputy portfolio manager at Van Eck Associates Corp., indicated that while they have adjusted their positioning on South African government bonds, they still see potential upside as the fundamental situation continues to improve.

The rand has also benefitted from improved trade terms driven by higher commodity export values and attractive interest rate differentials with the US. The currency has risen 10% against the dollar this year, yielding a 13% return for traders who invest in higher-yielding assets. Nevertheless, there are signs that traders are becoming more cautious; options data show a growing bearish sentiment towards the rand, with a notable increase in hedging against potential declines.

Looking ahead, analysts like Lee Hardman from MUFG Bank Ltd. anticipate that while the rand may continue to strengthen, its performance is unlikely to match this year’s gains. He highlighted that financial assets have already incorporated a significant amount of positive news in a relatively short period.

In conclusion, while South Africa’s financial markets have shown resilience and promise, achieving sustained growth will require deeper policy reforms to stimulate the real economy. As Lester Davids, an analyst at Unum Capital Ltd., articulated, “Once the growth engine moves, capital will flow.” He emphasized that while South Africa has intrinsic advantages, addressing fundamental economic issues is crucial for long-term success.