A positive shift in investment sentiment – but tangible wins are needed

The mood at Investec’s recent CEO Conference and UK roadshow was a blend of a real sense of optimism after the formation of the Government of National Unity (GNU) earlier this year as well as a recognition of the challenges that lie ahead and the need for meaningful action.

The annual conference brings together a cross-section of South Africa’s corporate leaders and institutional investors, largely from the UK, US and Europe. The event allowed for valuable interactions about South Africa’s current economic landscape, the business environment and the potential for growth. 

According to Jarrett Geldenhuys, Head of Investec’s Equity Capital Markets team, there was a significant increase in demand from foreign investors to meet with SA corporates, compared with the previous year – growing 33%, with over 800 meetings.  

While international investors remain largely on the sidelines, the overall sentiment has improved.  However, investors want to see this translate into something tangible, in the form of a pick-up in economic growth, earnings and/or fixed capital investment. These thoughts – along with other insights – were shared through a comprehensive survey of the attendees.

Geldenhuys noted a big shift in investor questions this year. “Last year was largely a box-ticking exercise ensuring investors’ macro models were not missing anything top-down on the country. This year we had detailed company-specific questions aimed at sifting winners from the pack. Apart from paring underweights to South Africa at an index level, it is clear there is more capital that is looking to flow to SA,” he explained.

Importantly, says Will Ridge, Head of Equities at Investec, that positive sentiment is starting to filter into activity. “Money talks and, in my mind, the most noteworthy shift is how South Africans are now thinking about their own savings and investments. There’s a real willingness to now explore domestic investment opportunities vs the previous obsession with externalising every cent possible,” he says.

The impact of this can be seen in areas such as improved construction activity, increased investment in residential property (not limited to the Western Cape), less money going offshore and entrepreneurs focusing on reinvesting for growth rather than simply harvesting dividends. 

To add to bottom-up nuances, Ridge highlighted that there are still concerns about the impact of the global sell-off in rates, as well as the geopolitical outlook (particularly in the light of the ‘red sweep’ in the US elections), and the knock-on effect on global trade and emerging markets.

From a global perspective, the Trump victory in the US has put the brakes on the emerging market growth theme for now, replaced by a “buy US, sell everything else” theme. Along with this, sentiment towards the UK and Europe is poor, while participants were more optimistic about China than one might have expected. They were also more optimistic about the prospects of a speedy resolution to the Ukraine conflict.

As an aside, deregulation remains a standout theme across developed markets, notes Ridge. “If markets like the UK and Europe want to compete with the US, they will need to embrace this, and the banking sector will be a key beneficiary.” 

“In the absence of confirmation of accelerated reform progress in South Africa and further improvements in local sentiment, we will remain at the mercy of global rates and commodity prices,” he noted.

In addition, from the in-depth survey, with 148 financial participants taking part, including 66 institutions, 61 corporates and seven private equity firms, four big outtakes emerged:

• In general, financial participants believe the first few months of the GNU have been better than expected. While the measurable impact is expected to be gradual, it is generally anticipated that the GNU will persist past the next election.
• Following this, financial participants are positive South African GDP will hit the 2% + number in the next two years.
• Business sentiment is overwhelmingly positive across all financial participants.
• SA Inc valuations are believed to be fair over the next year or so, with the greatest influence on valuations being the companies themselves.

“While delegates at this year’s CEO Conference are mindful of the need for the promise of the GNU announcement to translate into meaningful initiatives, there’s no doubt that there’s been a positive shift in corporate and investor activity. More and more, investors and corporates are seeking to deploy their capital in SA opportunities,” concludes Geldenhuys.