With a loss of nearly 11% since the beginning of the year (prices and dividends, in €), the Johannesburg stock exchange has strongly underperformed the global stock market. At this stage, it is significantly cheaper than some other emerging markets. Does that mean we should go for the South African market?
A nation striving to stay afloat
South Africa is struggling. After a perfectible 2022, which ended with a contraction of activity in the 4th quarter, the country experienced a challenging first quarter of 2023. Suppose it rebounded in the 2nd quarter (growth of 1.6% year-on-year and 0.6% compared to the previous quarter). In that case, the power grid load shedding, necessary to keep an ageing and outdated infrastructure afloat, was finally less than expected, thanks to the use of diesel plants. This has boosted activity in the industry and mining sector, giving a welcome boost to the economy.
Nevertheless, it remains a disaster, and the situation has changed little. Diesel generators may help, but it is far from the most economical way to produce electricity for a country of nearly 60 million inhabitants. In addition, at 32.6% in June, the South African unemployment rate remains the highest in the G20.
This underutilization of the vast existing workforce, combined with outdated infrastructure and inability to cope with the slightest spike in demand, makes the country unproductive and unable to sustain surges. The latter almost inevitably translates into spikes in inflation. It is, therefore, no surprise that the Bank and Reserve of South Africa are not waiting for a real take-off of the economy. Around 0.4% in 2023, it is expected to be around 1.0% in 2024 and 2025. Growth will, therefore, remain sluggish.
But equally important is the fact that monetary authorities believe that, at such levels, economic growth will be in line with South Africa's potential! This is a courageous but very worrying statement for investors.
For them, the question is simple: can they consider an emerging market an economy whose growth potential hardly exceeds 1%? They doubt this, and this largely explains the low valuation level of the Johannesburg equity market, well below the average of emerging markets and its poor performance since the beginning of the year. And for good reason: Far from being an emerging country, South Africa is today a country that is simply trying to stay afloat.
Assets for the future
However, the country has certain assets, which make it possible to hope that it will one day return to the forefront of the scene.
First, its wealth of raw materials – particularly precious metals – could, under normal circumstances, constitute the cornerstone of the economy. However, this would require the infrastructure necessary for the smooth running of operations and the transfer of production to markets to be available. Unfortunately, this is not always the case and will not happen soon.
On another front, the country can also take pride in the quality of some of its institutions, including its central bank. Credible, it did not hesitate to fight inflation robustly. It has a comprehensive inflation target (at 4.5%, with a tolerance of 1.5%, which means it is looking for inflation between 3% and 6%). But it is also true that it does everything to achieve it. During the recent price increase, it did not hesitate to push its key interest rate to 8.25% as early as May.
In this way, it controlled the increase in consumer prices, which peaked at 7.6% in the fall of 2022 and has since fallen back to 4.8% in August, a level already close to its target. Despite this relative success, she is careful not to announce mission accomplished. And for a good reason: having not touched its critical rates for several months, it sees a collapse in the interest rate differential that separates South Africa from the United States or the eurozone, where central banks have remained on the upward path longer. This weighed on the South African rand, which has lost 9% since the beginning of the year against the euro and a little more against the US dollar. This is likely to boost the prices of imported products and inflation.
Finally, on the assets side, we must not neglect the dynamism and adaptability of some large South African companies in sectors such as finance (36% of MSCI South Africa) or telecoms (7%), some of whom do not hesitate to spread their presence on the African continent and the rest of the world, seeking elsewhere the growth they lack on their domestic market. Ultimately, their dynamism and entrepreneurial ability could lead us to one day return to the Johannesburg stock exchange.
Still rich in raw materials, a sector representing 1/5th of MSCI South Africa, South Africa also has good quality institutions, which many other countries envy, and companies that dare to bet on unusual geographies. This gives them a different profile than many others.
But alas, on the domestic market front, the outlook remains bleak, and even with the shallow growth potential, estimated at just 1.0% by the central bank itself, South Africa will find it hard to enthuse investors.
Therefore, it is not one of the markets that we privilege.
