Markets may be underestimating the country's recovery story, by still valuing South Africa as though it remains trapped in the failures of the past decade, despite significant recent progress in reforming key sectors of the economy. What perhaps makes this bullish case for South African assets more compelling is that it doesn't rely on rapid economic growth, but rather on the successful execution of structural reforms already underway. This is critical: history shows that equity market valuations in South Africa have closely tracked gross fixed capital formation (GFCF), with higher investment regimes associated with sustained improvements in valuations of shares sensitive to the economic cycle.
The aftereffects of a lost decade and a half
In many ways, markets remain anchored to the narrative of the previous "lost decade and a half" of state capture, infrastructure decline and weak business confidence, essentially pricing in what South Africa has gone through in the last 10 to 15 years, without taking into account the work that's been done on the reform side.
South Africa's economic journey over the last decade and a half can be divided into three phases: a crisis period from roughly 2009 to 2020, followed by a resilience phase through 2024, and a capacity-building period that started last year. Hopefully, we will see an expansion phase thereafter. Investors, however, are still valuing South African assets as though the country were still stuck in the first two phases.
The real problem: investment, not finances
South Africa's biggest challenge is not a shortage of capital but a lack of productive investment. This is demonstrated by the long-term decline in GFCF, notably in the form of weak investment in infrastructure, energy networks and productive assets, all of which have directly correlated with constrained growth.
The good news is that relatively modest improvements could have an outsized impact, provided the implementation is right.
Much of the optimism rests on improvements in the energy and logistics sectors. For example, there's been a marked improvement in Eskom's energy availability factor, which has recovered from the crisis levels of three or four years ago. There have also been policy reforms designed to encourage private participation in electricity transmission and generation, as well as the establishment of the National Transmission Company of South Africa.
On logistics, rail networks have been opened to private operators, and reforms have been implemented to improve port efficiency. We have seen 11 private operators approved, and nine of those are private-sector participants with strong track records.
These changes address two longstanding constraints: weak balance sheets at state-owned entities and inadequate execution capacity. Hopefully, the involvement of the private sector will enable better utilisation of those assets and the modernisation of the network.
Source: SBR Research, Investec Investment Management as of 07.07.2026
Looking through the inflation shock: why the medium-term thesis remains intact
The recent oil price shock stemming from conflict in the Middle East has introduced near-term pressure on South Africa. We have seen this play out primarily through higher import costs, rising inflation and weaker growth momentum. Similarly, in the country's external accounts, a surge in fuel imports (particularly diesel and petrol) has materially increased the import bill and halved the trade surplus to R15.2bn in April. The magnitude of the increase underscores South Africa's reliance on imported refined fuels, amplifying its vulnerability to global oil price volatility.
This shock is feeding through into the broader economy. Higher fuel and transport costs are raising inflation and compressing household and corporate spending power, while weaker external balances and a more fragile current account position are adding pressure to the rand. As a result, growth expectations have been revised lower, with GDP growth now projected at around 1.2% for 2026, reflecting a combination of softer demand and tighter financial conditions.
In this context, the oil shock acts as a temporary brake on activity, delaying the recovery in cyclical growth and tightening monetary policy conditions. However, they do not fundamentally alter the domestic reform trajectory or the investment cycle underpinning the thesis.
Growth will be gradual, not spectacular
Even with the successful execution of these reforms, it's unlikely that South Africa will soon experience growth of 5% or 6%.
Rather, we should see a return to a stable investment cycle, with growth gradually climbing towards the 2% to 3% range as reforms gain traction and business confidence improves. Importantly, we expect equity valuations to rerate before that growth becomes visible in the official statistics (markets typically rerate before the growth fully appears in the data).
That could create an attractive opportunity for investors willing to act before the broader market recognises the shift.
Sectors that should benefit
Banks could be the main winners in the above scenario. Improving fiscal stability, rising business confidence and stronger demand for credit could boost profitability across the sector. Banks are already participating in financing infrastructure projects linked to some of the country's reform initiatives.
Because their businesses rely on well-functioning infrastructure and utilities, industrials, retailers, consumer stocks, and mining exporters would also benefit from improved infrastructure and logistics performance.
Source: Bloomberg, Investec Investment Management as of 07.07.2026
Risks remain
There are some caveats to keep in mind that could derail the outlook. Energy reforms appear to be relatively secure because much of the foundational policy work has already been completed.
However, logistics reforms remain vulnerable to resistance within Transnet and warned that a dramatic shift in future political direction could undermine investor confidence.
If we get a government that wants to reverse the reform agenda and centralise control, then the bullish case would be under threat. Even so, the regulatory reforms already enacted should be difficult to unwind and, in addition, initiatives such as Operation Vulindlela would still have continuity regardless of changes to governance.
South Africa's deteriorating water infrastructure is another area of particular concern. While this sector presents a significant challenge, there are grounds for cautious optimism. New policy measures, such as the release of the draft white paper aimed at ring-fencing infrastructure funding, improving municipal billing practices and strengthening accountability, should be positive in this regard.
Bottom line
South Africa's story is no longer about whether growth can suddenly leap to 5%, but whether investors are correctly pricing a country that is steadily emerging from a decade of underinvestment and institutional decline. As for moving into a phase of rapid economic growth, the next few years will be key.
Note to readers:
This article was written with the assistance of artificial intelligence, based on research by the author. The article was checked and edited by the author and our editorial team.
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