US financial analyst and investor Benjamin Graham famously said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
As we reflect on 100 days under SA’s government of national unity (GNU), there is a renewed sense of optimism in the air, driven by a growing belief that SA’s long-awaited structural reforms are beginning to take hold. With the market voting positively in the short-term — the JSE All Share index is up more than 10% over the last three months — what does the evidence reveal about how the market is weighing up the opportunities in the long run?
While optimism abounds, it’s important to take a clear-eyed view of the challenges ahead. Let’s explore what’s driving this newfound positivity, and where the risks may still lie.
SA’s recent progress in addressing the country’s infrastructural and operational challenges has been a significant factor in changing the narrative around investment potential. Eskom’s impressive turnaround, which has now led to 200 consecutive days without load-shedding, has been a major contributor to this shift. This improvement has had a meaningful effect on business confidence, with energy reliability acting as a key enabler for broader economic activity.
The same principles that enabled Eskom’s recovery are now being applied to other sectors. Transnet, which has long been seen as another bottleneck for economic growth, is set to benefit from similar reforms. The increased focus on private sector participation, underpinned by competent and motivated leadership at state-owned entities (SOEs), is creating a more conducive environment for growth.
While the challenges are real, the structural reforms under way have the potential to create a much more robust growth environment over the long term.
The visa regime has also seen positive changes, with efforts being made to streamline the process for skilled immigrants; which is vital for enhancing productivity and attracting talent. Home affairs minister Leon Schreiber even went as far as to say the department wants to bring 11,000 additional skilled workers into the country to drive further economic growth.
The SA Reserve Bank recently estimated that load-shedding shaved off 1.5% of GDP in 2023. With these structural changes, the removal of that drag on economic growth represents a meaningful upside. We are now at a point where the groundwork is being laid for a potential long-term economic recovery.
In addition to these structural shifts there are several cyclical factors giving SA’s economy a short-term lift. Global commodity prices, which play a pivotal role in the country’s fiscal health, remain favourable, supporting SA’s mining sector and contributing to tax revenue.
Locally, consumer sentiment has surged to its highest level since 2019, buoyed by a combination of further expected interest rate cuts and the positive effects of the “Two-Pot” retirement reform, which will increase access to savings for many South Africans. Lower interest rates tend to spur investment and consumption, and this is already beginning to show in the form of improved consumer confidence.
SA’s risk premium has also begun to narrow, and this is starting to create a positive feedback loop for the economy. Lower inflation and interest rates are leading to greater investment, which in turn boosts economic growth. This improved growth outlook helps reduce the country’s risk premium further, making SA an even more attractive destination for both local and foreign investors.
With the right policies in place and continued political will SA could be on the cusp of a new era of growth — one that rewards those who are willing to take the long view.
But here’s where it gets even more exciting: while local sentiment is improving, foreign investors are still largely on the sidelines. Since 2015 foreigners have sold roughly R1-trillion in SA equities and a similar amount in SA bonds since 2017. However, since the GNU came into power we have seen foreign investors start to dip their toes back into SA bonds.
They have not yet returned in a meaningful way to equities, but this presents a huge opportunity. If structural reforms continue to bear fruit and growth remains on an upward trajectory, the influx of foreign capital could serve as a powerful catalyst for further market gains.
Let’s take a moment to compare the current market environment to the so-called “Ramaphoria” period following the 2018 election. The JSE has outperformed this time around, with the All Share index up 10.6% in the first 100 days of the GNU, compared to 3.6% during the equivalent period after the 2018 election. Financials have been particularly strong, with a 27.4% gain in the first 100 days since May 2024, far outpacing the 17.4% gain during the Ramaphoria period.
What’s even more notable is the improvement in bond yields. The yield on SA’s 10-year bond has fallen from 12% to below 10%, reflecting reduced perceptions of risk. This decrease in yields makes borrowing more affordable for government, businesses and consumers alike, which is essential for driving investment.
Despite the recent rally SA equities remain attractively valued relative to their historical levels. The current valuation discount of more than 25% on the JSE All Share Index suggests there is still significant room for further appreciation if growth continues to improve and foreign investors begin to reallocate to the market.
It’s a similar story in the bond market, where yields remain elevated compared to global benchmarks. As inflation continues to ease and rates come down we can expect to see continued inflows into SA bonds, which will help reduce borrowing costs further and spur more investment.
Of course, there are still risks that could derail this recovery. Globally, we’re seeing signs of a slowdown in economic growth, particularly in the US and China, which could weigh on demand for SA’s exports, especially commodities. A sharp decline in commodity prices could put pressure on government revenues and exacerbate fiscal challenges.
Domestically, the sustainability of the GNU is the key political risk. While there has been a mature approach to coalition governance so far, tensions within the ANC could disrupt this fragile balance. But it’s worth noting that President Cyril Ramaphosa’s leadership has been praised on the global stage, and the commitment to making this GNU work is strong.
For investors, SA presents a unique opportunity. While the challenges are real, the structural reforms under way have the potential to create a much more robust growth environment over the long term. With local sentiment improving, foreign investors still largely absent from the market and valuations offering significant upside, the potential for a sustained rally is clear.
The key to unlocking this potential will be continued reform, particularly in areas such as logistics and infrastructure, where bottlenecks still exist. But with the right policies in place and continued political will SA could be on the cusp of a new era of growth — one that rewards those who are willing to take the long view.
As always, the prudent investor balances optimism with caution, but right now the case for SA is looking more compelling than it has in years.
• Eser is chief investment officer at 10X Investments.
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