South Africa’s Asset Rally Faces Challenges Amid Economic Concerns

South Africa’s financial markets have experienced a significant surge in 2023, with stocks, bonds, and the currency showing remarkable gains. However, analysts warn that the rally, dubbed the “Everything Rally,” could lose momentum if economic growth does not improve sufficiently to address the country’s high unemployment rate. The benchmark equity index has risen approximately 46% in dollar terms, local-currency government debt has produced returns exceeding double the emerging-market average, and the rand is on track for its strongest performance against the dollar since 2022.

Despite this impressive performance, some experts caution against assuming these gains will continue into 2026. Hendrik du Toit, chief executive of Ninety One Plc, which manages around 3.5 trillion rand (approximately $202 billion), emphasized the critical need for job creation. He stated, “Without it, you simply will not sustain momentum. Some of these businesses will do well, but the feast has been had.”

Economic growth remains a pressing concern, with gross domestic product (GDP) struggling to exceed 1%. The unemployment rate hovers above 30%, posing challenges for companies to generate profits that would justify their stock valuations. The National Treasury has projected a modest increase in average growth to 1.8% over the next three years, but investors remain cautious about relying on this optimistic outlook to drive investment.

Finance Minister Enoch Godongwana recently delivered a positive budget update, indicating revenue has exceeded previous forecasts. This led to an upgrade in South Africa’s credit rating from S&P Global Ratings, marking the first increase since 2005. Improvements in power supply and government reforms aimed at addressing logistical issues affecting exports have also contributed to a more favorable economic environment.

The FTSE/JSE Africa All Share Index is poised for its best performance since 2006, outperforming other emerging markets and leading indices like the S&P 500. Much of this growth has been driven by rising prices of precious metals such as gold, silver, and platinum, with mining stocks gaining over 180%. A significant majority of fund managers surveyed by Bank of America Corp. expressed optimism about South African equities, with 75% indicating a bullish outlook, an increase from 69% in earlier assessments.

Despite these positive indicators, analysts caution that further gains may be more challenging. Yields on 10-year government bonds have dropped more than 170 basis points, nearing historical lows. David Austerweil, an emerging-markets deputy portfolio manager at Van Eck Associates Corp., has adjusted his firm’s position on South African government bonds, noting that while the fundamental story is improving, valuations are less attractive than earlier in the year.

The rand has appreciated by 10% against the dollar this year, benefiting from improved trade conditions and an appealing interest rate differential compared to the United States. However, market sentiment appears to be shifting, with traders becoming more bearish on the rand in the coming year. The 25 Delta Risk Reversal has widened significantly, indicating a growing preference for options to sell the currency.

Looking ahead, experts stress the importance of deeper structural reforms to stimulate job creation and sustainable economic growth. Daniel Pinto, Vice Chairman of JPMorgan Chase & Co., highlighted the necessity for reforms that shrink the informal economy and improve living standards. “The government is doing some of the right things, and if reform deepens, we could see a positive shift,” he stated at a recent business summit.

As South Africa navigates its economic landscape, the interplay between political stability, policy reforms, and market performance will be crucial. Analysts like Lester Davids from Unum Capital Ltd. believe that capital will flow into the country once genuine growth is achieved. “South Africa has advantages. It’s not that difficult, but we have to get the basics right,” he concluded.

The current rally may be impressive, but the sustainability of these gains hinges on addressing long-standing economic challenges, particularly unemployment, to ensure a robust foundation for future growth.