In line with its Emerging Market peers, South African equities have been on a tear as of late, as global equities continue to be hopeful for a steady economic recovery. However, should global investors pay attention? Economics Global takes a further look.

South Africa’s major equity benchmarks are on track to erase their loses for the year, staging an impressive rally from their March lows. South African stocks have joined their Emerging Market and Developed Markets peers in an attempt to recoup their losses from earlier in the year, due to the COVID-19 pandemic.

The FTSE/JSE Africa All Share Index has surged almost 55% from its March bottom and is down only -2.23% as of July, while the FTSE/JSE Africa Top-40 Index surged 57.93% during the same time, generating a positive return of 1.12%, as South African equities continue to outperform their Emerging Market peers. In contrast, the MSCI Emerging Markets Index is still down over 3% for the year, while South Africa’s regional peers such as Nigeria’s Nigerian Stock Index, and Egypt’s EGX 30 index, are both down -9.94% and -24.38% respectively.

Similar to both Developed Market and Emerging Market equities, the rebound in South African stocks can be attributed to a surge in “Risk On” sentiment among global investors and traders, as expansionary monetary policy measures from central banks around the world have increased investor demand for risky assets. This increase in global liquidity has been a boon for Emerging Markets equities in particular, as investors feel a little more comfortable venturing out into this space in search of investment opportunity.

On a sectoral basis, investor demand for technology companies have helped lift South African equities from their lows, as the COVID-19 lockdown measures increased demand for online services such as social media, telecommunication, and telehealth. When digging deeper on a sectoral basis, technology has not been the only industry to push South African shares higher this year. In recent sessions, we have noticed that South African gold stocks have been challenging their technology peers for market leadership. Since mid-July, this group has more than doubled this year, as gold broke through the US$1,900 level, and is on pace to reach highs not seen since 2011.

Gold prices have been bid up in recent weeks, as investors pile into the precious metal at a time where central banks around the world are in the midst of unprecedented monetary stimulus measures, with some even venturing further into negative interest rate territory. Further, ongoing geopolitical risks, such as the continued tensions between the US and China, lingering trade tensions between the US and its trading partners, and the ongoing COVID-19 pandemic, have all been lending support to both gold prices and South African gold miners.

Risks

Despite the recent surge in South African equities, there are still some risks on our radar that potential investors and traders should be mindful of. The gain in South African equities in recent months has very little to do with investor confidence in the South African economy, and instead is more so based on the wave of market liquidity that has boosted investor demand for riskier assets. At the moment, we expect South Africa’s GDP to fall -8.1% this year, before rising to 3.1% in 2021, as the COVID-19 health crisis and lockdown restrictions continue to put a strain on the local economy.

Furthermore, recent spikes in COVID-19 cases in areas such as the US, Brazil, and India, continue to be a lingering concern for global investors. The risk we see here is that if countries around the world roll back their re-opening initiatives, and re-impose government-mandated shutdown measures, investors could dump their risky assets in favor of safe-havens, putting the prospects for South African equities in jeopardy.

Our View

Despite these risks, we do think South African equities have some opportunities for global investors, especially those focused on the Emerging Markets space. For those interested in South African equities, we prefer technology and gold shares, as these areas are supported by both cyclical and structural trends at the moment.

Though we don’t think global investors should just throw caution to the wind given this accommodative environment, we do think that given the “Risk On” sentiment at the moment, global investors should give South African equities a second look.

2020 Economics Global Inc.

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