South African Investment View | Structural recovery’s next phase

South Africa’s near-term outlook is mixed. Local elections are unlikely to directly change national economic policy, but they could influence municipal performance and political stability. Formal sector wage growth remains robust, yet a growing share of income is going to gambling, vehicles, offshore online retail, utilities and interest costs rather than traditional discretionary spending. Structural reform and stronger revenue collection remain supportive, while early signs of a recovery in commercial construction are emerging. The opportunity is real, but progress is uneven and much depends on better municipal governance, logistics and infrastructure delivery.

Local elections matter because of service delivery and political stability

The elections on 4 November should have less immediate market impact than the 2024 national election because they do not directly determine fiscal policy, government borrowing, Reserve Bank independence or the inflation target. Their economic importance lies elsewhere: municipalities increasingly shape the quality of electricity distribution, water provision, infrastructure, revenue collection and basic services.

Three forces will shape the outcome: declining dominant-party support, the continued rise of coalition government, and greater electoral pressure to improve municipal operations. More competition could strengthen accountability, but unstable coalitions could disrupt administration. The main longer-term risk is that a very poor ANC result intensifies internal leadership pressure and begins to unsettle the Government of National Unity ahead of the 2029 national elections.

Consumer spending has shifted away from conventional retail

Household income growth has been relatively strong and rising property prices are creating a wealth effect, yet traditional retail sales remain weak. A larger share of disposable income is being absorbed by gambling, vehicles, offshore online purchases, municipal charges and debt-servicing costs.

Gambling expenditure has risen quickly, while lower-priced Chinese vehicle brands have made new cars more accessible. Platforms such as Shein, Temu and Amazon still account for a relatively small share of total spending, but they have diverted further demand from domestic retailers. The pattern also helps explain why earlier interest-rate cuts did not deliver the usual lift to discretionary retail. If rates rise again, households may reduce conventional spending further rather than unwind these newer habits. This favours a selective view of consumer-focused shares, with banks better placed than discretionary retailers.

Structural reform remains supportive, but progress is uneven

Electricity supply has improved materially, shifting attention towards municipalities, water, transport and logistics.

Performance across state-owned enterprises is mixed: the aggregate picture has recently levelled off, but rail and passenger rail activity are improving, while airport traffic and international tourism have strengthened. Better logistics would allow exporters to benefit more fully from supportive commodity prices and global demand.

However, stronger revenue does not remove the need for fiscal discipline and markets have already priced in some of the improvement. Investors should distinguish between genuine operational progress and optimism that is already reflected in asset prices.

A commercial construction upcycle may be taking shape

Office vacancies have moved closer to pre-pandemic levels even though construction activity remains well below earlier norms. As existing space fills and little new supply is added, the case for new development strengthens. Building-plan data support this view: the recovery is uneven, but plans for office and banking space have risen sharply and planned shopping-space development has also improved.

The evidence does not yet point to a broad-based boom. Residential construction remains subdued and industrial and warehouse activity lacks the same momentum. The emerging theme is therefore a potential commercial upcycle. If approved plans become completed projects, this could support capital expenditure, employment, and selected construction and building-materials companies.