A resurgence of investor confidence in South Africa

Following a smooth transition to a government of national unity, and with signs of progress in addressing structural obstacles to economic growth, local and international investors are taking a fresh look at South Africa.

Business confidence has recovered to 2022 levels and looks set to improve further as collaborative efforts by business and government bear fruit.

Undervalued financial asset prices have repriced, with the equity markets rallying 13.5% and the rand strengthening from nearly R19/$ to just over R17.00/$ at the end of September.

The 10-year bond yield has dropped 180bps to 10% – its lowest level in two years.

South African stocks are experiencing their best third quarter in over a decade with the FTSE/JSE Africa All Share Index rising by approximately 10% during the past three months.

Investec’s Global Investment Strategy Group (GISG) has given South Africa a risk score of 1.5 (on a scale of -3 to +3) for the fourth quarter of 2024 – up from +0.5 for the same period last year.

“We expect growth in South Africa to surprise on the upside over the coming few years. This expectation is at odds with what is currently priced into South African assets. We believe South African equities and fixed income will perform strongly over the coming few years,” says Chris Holdsworth, Chief Investment Strategist, Investec Wealth & Investment International.

What’s on investors’ radars?

A delegation led by Deputy President Paul Mashatile attended London Investment Week – an annual event hosted by the SA government to engage global investors and business leaders. In the same week, Investec hosted an event at their London office with the Deputy President and emerging market fund managers who collectively manage $19 trillion.

Speaking at Bloomberg’s Future of Finance event in Johannesburg on his return from London, CEO of Investec Bank Limited, Cumesh Moodliar shared insights from this meeting, saying that foreign investors are cautiously optimistic. The main concerns were around government reform, infrastructure progress and private-public partnerships.

“One of the key questions from investors to the government delegation was, ‘Will the GNU hold?’ And the clear response was that they believe it will and they are committed to it holding,” says Moodliar.

“Investors wanted assurances that the GNU will prioritise the fight against crime and corruption, and they asked for clarity around the regulatory environment. For example, they cited that at times our competition law framework has prohibited corporate actions which would have supported longer-term growth and opportunity in the SA economy.”

The country’s persistent structural problems, including municipal dysfunction, are further complicating the investment landscape, Moodliar continued. “A clear sense of commitment around energy supply was a key issue, and the challenges facing transport and logistics were also raised. Linked to that was a debate on how local government is being managed to support ongoing infrastructure build and maintenance.”

Many of the country’s municipalities are in a parlous state, unable to deliver basic services. This has impacted livelihoods, with businesses shutting their doors due to ineffective local governments.

There was a clear focus by investors on the potential water crisis facing the country, and municipal capabilities to respond to this. “They were looking for a level of commitment from government,” says Moodliar, “a specific task team to focus on the water crisis, legislation that will enable more private-public sector partnerships in water infrastructure, and support for local authorities that are ultimately the final interface between government and the consumer in SA.”

Insights from Investec’s Global Investment View Q4 2024

“In principle, there are two primary drivers of growth in South Africa: the external environment, estimated using commodity prices, and the internal environment, estimated using South African business confidence.

“History shows that the economy can grow above 3% in an environment where global commodities are mildly weak if South African business confidence picks up, which is a likely scenario. We expect GDP growth of 2.5% to 3% over the coming five years, well above the consensus forecast and what we think is priced into the market.”

What South Africa needs to get right

Despite the positive sentiment, investors remain concerned about economic growth and the country’s sovereign credit rating. South Africa remains on sub-investment grade due to the slow implementation of structural reforms and subdued growth.

The consensus forecast is an economic growth rate of 1.0% y/y for this year, going up to 1.7% y/y in 2025, and 2% in 2026 on the back of greater fixed investment spend. “I think the structural reform programme is, at the outset, what will drive this economic growth,” says Moodliar.

Eskom has achieved over six consecutive months of uninterrupted power supply since 26 March 2024. The energy availability factor is at the highest level since 2021, with planned maintenance at a four-year high too.

“Structural reforms, coupled with institutional strength, will grow South Africa’s GDP, resulting in increased tax revenue, a lower budget deficit, and inflation within target range or lower. That will all feed into investor confidence," says Moodliar.

Role of the private sector

It seems clear that public-private partnerships are critical to bolstering South Africa’s growth story and investment landscape. To this end, the President’s CEO Initiative was launched as a joint effort with private sector companies that has raised some R250 million to assist government with technical expertise in energy, logistics and crime prevention.

The 140 CEOs participating in the initiative met at a gathering with President Cyril Ramaphosa this week to launch phase two of the project. “Levels of optimism were high, with leaders doubling down on their commitment to the CEO Initiative and expressing support for funding additional structural issues,” says Moodliar.

“There's a genuine commitment to South Africa and a realisation that we need inclusive growth if we are to bring the unrepresented into the economy, be it through employment, social grants or other kinds of support.”

Following a decade of moribund growth and depressed investment confidence, South Africa is at last showing signs of a rebound. Moodliar is adamant that we cannot afford to let this moment go to waste.

“Addressing structural concerns is essential to maintaining investor confidence and ensuring long-term economic stability. It is only by accelerating structural reforms and harnessing the power of the private sector that the country can sustain economic momentum and attract further foreign investment.”