Momentum Investments has warned that SA’s deteriorating water infrastructure and underperforming local councils are a risk to the economy and financial markets.
Sanisha Packirisamy, chief economist at Momentum Investments Group, said the hegemony of the government of national unity (GNU) in attending to basic services, particularly water infrastructure, will have an impact on SA’s financial markets, adding the disintegration of the two will hurt the markets.
“There are also potential risks to the longevity of the current positive environment in the SA economy and financial markets. Paramount among these would be threats to the survival of the coalition GNU. This would derail expectations that a higher local growth outcome would be forthcoming from more aggressive policy reform implementation in the coming years,” she said.
“Other critical domestic risks that need to be monitored are SA’s crumbling water infrastructure, transport sector deficiencies and local government mismanagement. Insufficient progress on addressing these issues would keep SA’s country risk premium at elevated levels,
“Water scarcity remains critical, with three-quarters of usable surface water fully utilised. Mismanagement and underinvestment have exacerbated the crisis, leading to declining water quality and excessive consumption rates. Only 54% of drinking water systems met compliance standards in 2023, down from 95% in 2014.”
The chair of asset management firm Coronation, Alexandra Watson, has warned that SA’s water security crisis and failing municipalities are eroding the good work done by Eskom in ridding the country of load-shedding.
Businesses and think-tanks are increasingly voicing their concern about water shortages countrywide — largely the result of ageing and neglected infrastructure, particularly in the economic heartland of Gauteng — and a lack of service delivery due to widespread municipal dysfunction.
The Bureau for Economic Research has urged the government to curb local political interference in municipal management and to intervene in failing municipalities, which have been a drag on economic growth and service delivery.
Africa’s largest bank by assets, Standard Bank, expects about R150bn investments in rail and infrastructure as public-private partnerships take shape.
Momentum has expressed its optimism on SA Inc, too. Going into 2025, it said it prefers local stocks over global equities, adding that valuations of SA securities remain at historic lows despite a huge rally last year after renewed optimism in the financial markets following the formation of the GNU.
Packirisamy said several fundamental drivers for the SA economy and asset classes have now become clear tailwinds, including the fading impact of load-shedding and optimism that accelerated policy reform implementation will push growth higher.
“Local growth fundamentals are tailwinds for SA equities. Even after a significant rally since March 2024, SA equities still trade at large valuation discounts compared with the rest of the world and its history. Assuming a conservative 19% earnings growth in the next year, the SA equity market is now one-half of a standard deviation, cheap against the average since 1999. Moreover, the SA equity market remains underowned,” Packirisamy said.
“The SA equity market remains under-owned within global emerging market (GEM) funds, with SA currently the fifth-largest underweight in these funds. Once these GEM investors start believing that the improvement in SA’s fundamentals is indeed sustainable, there could be a meaningful flow of funds into SA equities from this source.”
SA Inc had a strong 2024, significantly picking up after the May elections. The rally was somehow muted in the fourth quarter after the election of Donald Trump as US president-elect.
SA assets performed poorly in the fourth quarter, with the FTSE/JSE all share index dropping 2.1% in the fourth quarter of 2024. For the 2024 year as a whole, SA equities underperformed global equities, ending the year 13.4% higher compared with global equities which ended the year 17.5% in the black.
Packirisamy said the fading electricity crisis, which has seen Eskom keeping the lights on since March 2024, has positive implications for SA’s equity and bond markets.
“For equities, the combination of a better-performing economy and lower generator fuel costs should support higher company profits. SA bonds should benefit from better fiscal numbers due to a higher corporate tax take, lower Eskom bailout risk and lower country debt default risk.”
Data from Bloomberg and Momentum shows that SA’s risk premium has decreased since the May elections.
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