South African stocks’ heady rally faces economic growth hurdle

South African markets are riding a wave of optimism that hasn’t been seen in years. Whether that lasts depends on one thing: economic growth.

In interviews with four market participants in Cape Town this month, the general view was that South Africa’s stagnant economy is the main hurdle that will keep stocks from sustaining their heady rally. So far, gains have been propelled by a narrow slice of the economy as mining companies reap the rewards of record gold and silver prices.

Read: SA growth could surprise to the upside – Standard Bank

According to Allan Gray portfolio manager Jithen Pillay, South Africa needs concrete evidence of corporate earnings power to keep the momentum after the stock market soared almost 40% last year. He’s sticking to companies with global revenue streams, like Standard Bank Group, which is expanding in places like Angola, Ghana and Kenya.

“There have been lots of things that are encouraging for South Africa, but I think we’re slightly more circumspect because we aren’t yet seeing that translating to progress,” Pillay said. “We’re slightly worried about valuations getting ahead of themselves.”

Strong gold and platinum prices delivered much of last year’s returns, and have continued to lift the broader market higher this year, while domestic cyclicals have made a more modest recovery. While earnings growth in 2026 was 33%, more than double the emerging-market average, mining companies accounted for the bulk of that with an increase if 112%, according to data compiled by Bloomberg. Earnings growth is expected to slow to 7.2% this year, according to Bloomberg Intelligence.

For gains to broaden out, much depends on the government’s ability to deliver on measures to stoke economic growth. Finance Minister Enoch Godongwana is scheduled to reveal more details about reforms in his budget presentation to lawmakers on Wednesday.

Economic growth has struggled to rise above 1% over the past decade, in stark contrast to the 7%-plus growth rate achieved during the last commodities supercycle in 2006. The economy is expected to expand about 1.6% in 2026 and 1.9% in 2027, according a Bloomberg survey.

Read: South Africa is at a macro crossroads …

“I hope we can deliver on our growth reforms and if you get to that 2% GDP growth level, you get more operating leverage,” said Hannes van den Berg, a portfolio manager at Ninety One Plc. “If that does come through from a macro and a supportive GDP perspective, I think a lot of the industrial and cyclical companies are undervalued and underappreciated from an earnings perspective.”

South Africa’s appeal is also being boosted by shifting global capital flows. Elevated valuations and concentration risks in US equities are prompting investors to look elsewhere, particularly toward emerging markets trading at deep discounts to developed peers.

The Johannesburg benchmark stock index trades at nearly 11 times forward earnings, a 46% discount to MSCI’s gauge of developed-nation equities.

Foreign investors are piling into South African stocks at a pace not seen in two decades. Non-residents have been net buyers of Johannesburg-listed shares to the tune of R669 million ($42 million) a day on average since the start of the year, according to JSE data, the fastest pace in two decades.

“South Africa has become more investable than it was a few years ago,” said Gustav Schulenburg, a portfolio manager at Old Mutual Investment Group. “Those flows will pick up. There’s a lot of money sitting on the sidelines.”

While foreign inflows have been “fantastic for South Africa,” there is reason for caution, said Casey Sprake, a market strategist at AG Capital. Elevated metals prices support the fiscal outlook because of higher tax revenue, but they won’t last forever, she said.

“We often get too comfortable or reliant on these commodity swings,” she said. “This is a cyclical thing. It’s only going to last so long.”

Political risk remains a constraint, particularly ahead of municipal elections that investors view as an important signal of support for the main parties that make up the governing coalition.

“The big question South Africa needs to figure out is who will be the next national leadership and whether the coalition approach continues,” said Van den Berg. “There will be those who support cooperation because it’s delivering, and those who push against it for political positioning.”

Read: When the budget adds up but growth doesn’t

Against that backdrop, equity managers are increasingly selective. Banks remain a core exposure, but not as a blanket bet on the domestic economy. Schulenburg sees value across the sector as lower inflation and improving confidence support balance sheets and credit quality.

Pillay, however, favours lenders with diversified earnings streams rather than pure domestic exposure.

“We’re not trying to make a big macro call,” Pillay said. “We’re trying to own businesses that can grow earnings even if local growth remains anemic.”

Outside financials, managers are gravitating toward companies with offshore revenues and defensive characteristics. British American Tobacco Plc and Anheuser-Busch InBev SA/NV feature prominently in portfolios, offering hard-currency earnings, strong cash generation, and resilience during periods of market volatility. Both derive only a small share of revenue from South Africa, providing a natural hedge against domestic uncertainty.

There is also selective interest in retailers and industrial companies that have lagged the broader market and are viewed as capable of internal turnarounds. Pillay said some food and apparel retailers are trading at valuations that imply little improvement, despite management actions that could lift margins even in a modest growth environment.

“If growth accelerates, they’ll benefit,” he said. “If it doesn’t, we still think they can improve earnings through self-help.”

© 2026 Bloomberg

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