Stocks of non-commodity South African companies look set to rally next year given they trade at a deep discount and trailed the performance of both local bonds and the wider equity gauge in 2025, according to a veteran fund manager at Ninety One Plc the nation\u2019s top investment firm.<\/p>\n
Surging precious-metals prices triggered a rally of more than 50% in South Africa\u2019s benchmark share index in dollar terms this year, outpacing gains in European, emerging-market and US gauges. Local government bonds, as measured by the ALBI index, returned 38%, with the yield on 10-year rand debt plunging by a quarter to 8.36% from an April high.<\/p>\n
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But shares of local banks, retailers and industrial firms have \u201clagged massively,\u201d presenting an opportunity, said John Biccard, who manages Ninety One\u2019s R8.7 billion ($518 million) Value Fund.<\/p>\n
When calculating a share\u2019s value today by projecting its future cash flows and adjusting these back to present value using a discount rate \u2014 typically a risk-free one such as the yield on government debt \u2014 locally focused stocks should be worth more, said Biccard, whose fund is the fifth-best performer over the past decade in South Africa excluding those that are commodities-focused, delivering an average annual return of almost 17%.<\/p>\n
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\u201cIt makes no sense whatsoever, because an equity is a leveraged valuation on a bond,\u201d said Biccard. \u201cEveryone says South African bonds have done really well and they\u2019re still bullish. And I say, \u2018Well, you\u2019re crazy. You just go and buy these South African equities that have done nothing. That is a much smarter thing to do.\u2019\u201d<\/p>\n
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After years of corruption and mismanagement, Africa\u2019s biggest economy is showing signs of improvement. Regular power blackouts have subsided and the operations of the state-owned ports and freight-rail operator are stabilising after volumes fell to a three-decade low, hitting exports.<\/p>\n
A credit upgrade by S&P Global Ratings, South Africa\u2019s removal from the Financial Action Task Force\u2019s dirty-money list, and slower inflation amid a 13% gain in the rand to the dollar this year are further evidence of a better trajectory.<\/p>\n
Despite growing tensions between Pretoria and Washington \u2014 with the Trump administration imposing 30% tariffs on selected South African products entering the US and no ambassador in the American capital \u2014 \u201cthere are definitely fewer things to worry about than there were on Jan. 1 \u2014 that\u2019s for sure,\u201d said Biccard.<\/p>\n
While the economy hasn\u2019t expanded more than 1% annually for the past decade, the rate is quickening. The sluggish growth has seen foreign investors favor local bonds over equities as they wait to for expansion to pick up, said Biccard.<\/p>\n
\u201cYou need the foreigners to come in and you need the South African fund managers to stop buying gold and platinum and selling SA Inc,\u201d said Biccard.<\/p>\n
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He has raised the Value Fund\u2019s exposure to local stocks, with half of the portfolio now in South African equities, compared with an estimated 35% for the benchmark, and he plans to keep adding if prices fall further.<\/p>\n
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About half the fund is invested in mid-sized companies with dividend yields near 6%, while large domestic firms such as Bidvest Group and Woolworths Holdings account for about 20%, trading on yields of roughly 4%, he said. Overall, the fund trades at about eight times annual earnings, with an aggregate dividend yield near 5%.<\/p>\n
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The shares may be worth as much as 50% more, with Biccard expecting 35% to 40% upside as investors rerate the portfolio once they recognise improving growth and lower discount rates.<\/p>\n
Biccard argues that South African shares offer a cheaper, indirect way to play gold and platinum, saying they should benefit if metal prices keep rising and are unlikely to fall given their already low valuations.<\/p>\n
His ideal scenario is for gold and platinum prices to move sideways, supporting the economy until South African shares catch up, while bond yields stay flat.<\/p>\n
\u201cThere\u2019s limited downside and there\u2019s quite a lot of upside,\u201d he said.<\/p>\n
\u00a9 2025 Bloomberg<\/p>\n
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