South Africa’s rundown stocks deserve a second look

The trading floor of the Johannesburg Stock Exchange in South Africa

Guillem Sartorio / AFP via Getty Images

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South African stocks have underperformed for a long time – a really long time. “In US dollars, our market is where it was in 2005,” said Duncan Artus, chief investment officer at Allan Gray in Cape Town.

This year is different. The

iShares MSCI South Africa

The exchange-traded fund (ticker: EZA) gained 14%, while the global emerging markets remained almost unchanged. One reason for this is that South Africa produces 80% of the world’s platinum group metals, which have risen to a six-year high due to the global recovery in industrial demand. That raised stocks like that

Impala Platinum Holdings

(IMP.South Africa) and

Sibanye Stillwater

(SSW South Africa).

But it’s not the only good news for the nation of 60 million. “Other commodity-intensive markets such as Brazil or Colombia did not develop well this year,” says Marco Spinar, portfolio manager at Neuberger Berman Emerging Markets Equity Fund. “Other factors affect South Africa.”

One of them is Covid-19. Reported cases and deaths have decreased almost vertically due to a spike in January. Politics is moving in the right direction: the reform-minded President Cyril Ramaphosa ousted an important rival, Ace Magashule, as Secretary General of the African National Congress.

Ramaphosa also had a tight steering ship. Rating agency Moody’s skipped a review this month and removed any downgrade from the table, and the rand, South Africa’s currency, hit a two-year high against the US dollar. That makes yields above 9% tempting for 10-year South African bonds, says Arthur.

“I think the South African macro is pretty reasonable, but most of the investors I speak of think it’s pretty weak,” said David Aserkoff, head of equity strategy for Emerging Europe, Middle East and Africa at

JP Morgan.

As weak perception catches up with not-so-weak reality, lagging financial and consumer stocks can get a boost. Aserkoff and Spinar both prefer

Capitec Bank Holdings

(CPI.South Africa), a smaller player whose digital reach is growing rapidly. Arthur likes

Standard Bank Group

(SBK.South Africa) which has the best pan-African franchise. Louis Lau, director of investments at value-driven Brandes Investment Partners, added that the entire banking sector was well supplied last year due to the raging pandemic and was prepared for profit increases as a rebound woke up. “We like the South African banks,” he says.

Aserkoff is bullish among other consumer-centric names


(BVT.South Africa), a conglomerate with companies from office cleaning to car rental and telecommunications

MTN Group

(MTN.South Africa). MTN’s shares are up 60% this year but need to keep going after a long decline, he claims.

Arthur adds a multi-profile stake


(REM.South Africa) and retailers

Woolworths Holdings

(WHL.South Africa), which is aimed at upscale consumers in South Africa.

South Africa still faces enormous challenges. Annual economic growth has crept in to 1% to 2% for a decade, leaving youth unemployment at 40%. The state electricity monopoly Eskom is a black hole of debt and power outages that has shaken off attempts at reform.

The government must face powerful public sector unions in upcoming negotiations or blow the budget again. Covid vaccinations have barely started, leaving the nation vulnerable to another wave of the disease. “Domestic stocks are basically traded like options on vaccines,” says Arthur of Allan Gray.

However, “not weak” could still be pretty good for this rundown market if metal prices hold up. South Africa should get back on the investor radar.

Corrections & reinforcements

Allan Gray is an investment management firm headquartered in Cape Town. In an earlier version of this article, the company name was misspelled.

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