Market Update: While Wall Street Wobbles, South Africa Gains Momentum

“In the short run, the market is a voting machine. In the long run, it is a weighing machine.” (Benjamin Graham)

In June, the performance gap between the JSE and developed markets narrowed amid positive sentiment, and, for the first time in years, the investment case for South Africa was being made not by local optimists but by global institutional investors.

While global markets had to contend with a sharp technology sell-off, lingering geopolitical uncertainty, and a more hawkish Federal Reserve, South African assets narrowed their relative performance gap on the back of a retreat in stagflation fears and a positive showing in a key institutional investment survey.

Late-month “chipwreck” rattles investor confidence

For much of June, US equities appeared to be having a good month, hitting a new high before a sharp correction in technology shares in the final weeks. The S&P 500 ended the month in the red, thanks largely to a late correction concentrated in semiconductor and AI-adjacent stocks triggered by investor concerns about the scale and sustainability of AI capital expenditure. South Korea’s KOSPI, a strong beneficiary of the AI growth story, fell more than 10% in a single session. The tech sell-off, though potentially short-lived, is a keen reminder of how dependent the US stock market’s performance is on this single narrative.

South Africa: a valuation and sentiment-recovery story

In South Africa, fears of stagflation began to dissipate, and foreign investor sentiment improved. These positive developments haven’t yet been reflected in the JSE All Share Index’s performance, which was negative in June.

However, a Bank of America survey of 14 institutional fund managers found a notable increase in foreign investors’ perceptions of South African assets, with respondents showing the highest level of optimism since 2009. More than 90% of respondents said they were seeing more buying opportunities than selling opportunities in South African equities, and a net 57% of managers were overweight on South African equities.

The positive drivers reflected in the survey are broad-based.

• Oil. The single biggest catalyst for South African asset sentiment in June was the decline in oil prices in June. Brent crude fell by close to 30% from its May peak as tensions in the Middle East eased. For South Africa, a net fuel importer, lower oil prices reduce inflation, ease pressure on household budgets, improve the current account, and give the South African Reserve Bank more room to manoeuvre.
• Inflation. The stagflation fears that dominated May’s investment narrative have largely dissipated. Net inflation expectations among surveyed fund managers plummeted tenfold, from 75% in May to 7% in June.
• Political stability. Investors are assigning a lower political risk premium to South Africa than they did before the 2024 election. The Government of National Unity has broadly held, and while structural challenges remain, the direction of travel looks more predictable than expected. Both South African equities and bonds are benefiting.
• Valuation. South African equities trade at significantly lower multiples than their US counterparts. South African government bonds offer some of the highest real yields in the world, and Deutsche Bank forecasts a rand recovery to R16 against the dollar by year-end, supported by the trade balance, restrictive monetary policy and improving political sentiment.

Sustaining SA’s early-stage re-rating

The SARB is widely expected to hike the repo rate in the third quarter, with 100% of surveyed fund managers anticipating a move. That creates a headwind for rate-sensitive assets and could impact sentiment. The rand remains vulnerable to a stronger US dollar, but has managed to hold its sub-R17 level, notwithstanding the ups and downs experienced this year.

The re-rating of South African assets is underpinned by fundamental factors, but remains in its early stages. The true test will be whether the macro conditions that supported June’s sentiment shift (lower oil, fading inflation fears, political stability) hold through the second half of the year.

*All facts and figures accurate at time of writing.

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