Any chance that investors will soon be tempted to buy the battered stocks of South Africa’s locally focused companies will be tested Wednesday when Finance Minister Tito Mboweni presents his medium-term budget.
Investors will need evidence of real and achievable reforms before they will bet on the plan set out by President Cyril Ramaphosa to revive an economy in its longest recession such 1992, according to Stanlib, a Johannesburg-based money manager that oversees more than R600 billion ($37 billion).
They will be looking to Mboweni for detail on how the government will tackle its ballooning public-sector wage bill and how it will fund debt-crippled state-owned companies, otherwise “South Africa Inc.” stocks may continue to be shunned, despite enticing valuations.
“We hear some positive things, but I think we have reached the stage where we have got to see tangible delivery for investors to really respond to the opportunity that does sit there,” said Mark Lovett, head of investments at the Johannesburg-based company. “A lot of people want to see actions in place, rather than just the narrative in terms of what would be quite difficult reforms in the South African context.”
Mboweni’s budget is expected to support the objectives Ramaphosa outlined in his October 15 address to lawmakers. That plan embraces job creation, increased infrastructure investment and enhanced energy security, targets an average annual economic growth rate of 3% over the next decade and envisions the government reining in surging debt and curtailing spending.
“It is a challenging environment for those reforms to be delivered, with growth being so low, and the fiscal pressure that we are seeing, but absolutely, it would be an important catalyst for a revaluation of South African instruments,” Lovett said in an interview.
After years of economic malaise, South African stocks now trade at the biggest discount on record relative to their emerging-market peers. Their discount to US equities is the widest in more than 12 years.
Foreign investors have accelerated their exit from South African assets in 2020. They are on track to be net sellers of stocks for a fifth consecutive year, with outflows reaching $7.2 billion by October 26, the most by that date since Bloomberg started tracking data from exchange operator JSE Ltd. in 1997. Foreigners have sold South African bonds for three years, offloading $3.9 billion so far this year.
The result is a market in shares of domestically focused companies that is becoming too cheap to ignore, but which still holds risks for investors, said Lovett.
“We are now starting to see pockets of valuation opportunities in SA-Inc. type shares, but it is not universal,” he said. “There are still a number of areas where there will be long-term challenges in this lower-growth environment that we are worried about.”
Overall, Stanlib still sees better opportunities in companies exposed to overseas markets, so-called rand hedges, than those relying on Africa’s most industrialised economy.