Rediscovering the South African equity market

Key takeaways:

• Despite economic setbacks during the Great Recession and Covid-19, South Africa is poised to almost double its growth in 2025 and 2026
• Financial reforms, lower rates and inflation are expected to foster an environment of stronger consumer spending
• The economy boasts one of Africa’s most industrialised, technologically advanced, and diversified, but electricity disruptions and shortages have historically held back growth. However, the government has renewed impetus to improve legacy infrastructure, and look for new opportunities in renewable energy solutions
• The country is well positioned to benefit from new technologies and its vast mineral wealth as nations look to integrate AI across their economies and diversify their supply chains from China
• South African mining performance is returning into favour. Technology has become one of the larger industries, having grown rapidly from zero to about 15% in just a few years
• South African equities have a higher dividend yield than the average emerging market, making the market interesting for income-focused investors. Moreover, their valuations today are well below their 10-year average
• But the RSA economy will not be insulated from trade tariffs, which could disrupt global supply chains and raise costs worldwide, while a repeat of severe droughts/heatwaves would dent economic growth projections

Points of differentiation:

This paper provides valuable and unique insights into the structural differences and investment opportunities within the South African equity market.

The paper reminds readers that South Africa holds the G20 Presidency in 2025, with an agenda set to focus on improving the lives of South Africans and growing the economy.

It explains how the combination of financial reforms and lower interest rates position the country well to benefit from increased consumer spending and the trend for new technologies.

It highlights the benefits of the South African equity market, which has a large exposure to technology and a large mineral wealth market critical to the expansion and adoption of artificial intelligence.

The analysis also shows the significant contribution from dividend yields to the total return performance of the market historically.

The findings show that equity valuations are inexpensive relative to peers and history, making the market interesting for value investing. 

What does our research mean for investors?

For investors, this research underscores the opportunities and risks of the South African equity market, shaped by the interplay of market composition, and economic growth dynamics. Here’s what it means:

• South Africa’s gross national income per capita places the country closer to the global average: Its economic growth is expected to double in 2025 and 2026, according to the IMF
• Important Financial reforms, lower rates and inflation could foster an environment of stronger consumer spending and provide the economy with a reset
• Political and economic drive to develop and modernise the infrastructure: South Africa is one of region’s most industrialised, technologically advanced, and diversified. There is renewed impetus to improve legacy infrastructure and address electricity shortages and look for new opportunities in renewable energy solutions
• More focus on natural resources: South Africa is well positioned to benefit from new technologies and its mineral wealth as nations look to integrate Artificial Intelligence across their economies and diversify their supply chains from China
• Equity sector leadership is changing: South African mining performance is returning into favour, displacing previous sector leaderships. Technology has become one of the larger industries in the South African equity market, having grown rapidly from zero to about 15% in just a few years
• Income and valuation in focus: Dividend yields make an important contribution to the performance of the equity market, making it interesting for income-focused investors. In addition, the market has become sharply derated and interesting for value investors
• Climate and protectionist policies are risks: The RSA economy will not be insulated from trade tariffs, which could disrupt global supply chains and raise costs worldwide