Published: October 28, 2024

South African Equity: An Opportunity for Investors


At Arysteq Asset Management, we believe the case for South African equities has significantly strengthened over the past few months. This is driven by several key factors. The recent rally on the JSE All Share Index (JALSH), while impressive, does not seem fully reflected in its price when compared to broader emerging markets or global peers. A deeper look at price-to-book (P/B) and price-to-earnings (P/E) ratios, among other metrics, reveals that South Africa remains undervalued.

A Good Run

The formation of the Government of National Unity (GNU) has brought hope of political stability, improving investor confidence in South Africa’s long-term prospects. Moreover, banks have shown resilience and appear well-positioned to capitalise on a GNU government whose success could be the catalyst for growth in South Africa.  Further, the stabilisation of the power grid appears to be boosting business operations and the broader economy. We have seen that, a growing number of South Africans have moved off the grid, easing pressure on electricity demand. Falling interest rates are another key factor. As borrowing costs decline, both consumer spending and economic activity are expected to rise, benefiting businesses and households alike. This is especially beneficial for the property sector [Refer to "Always looking for opportunities note at the end"]. The introduction of the two-pot retirement system is also anticipated to inject liquidity into the economy, spurring demand in consumer and capital goods. To test what all this means for market sentiment we ran the returns for the JALSH Index in South Africa since the formation of the GNU and compared these returns to the indices of other large emerging market players such as Saudi Arabia, Mexico, Brazil and India [see graph below].  What we observed was a clear positive trend in total returns in favour of South Africa. The GNU could perhaps be the catalyst to unlock value in the South African markets. When indexed to 100, the JSE ALSI index returned an impressive 17% in local currency, making it the strongest performer by some margin.

Source: Bloomberg

We then examined the USD-denominated return equivalents across the same emerging market indices, it highlighted the impact of a strengthening local currency (the Rand) relative to the peer group.

In USD terms, the JALSH returned 25.85%, with the closest peer being India where the Nifty50 returning a like for like 14.70 % in the same period. The rest of the peer group were either flat or negative. See table below.

04/30/2024 - 09/30/2024Total Return in USD
South Africa (JALSH)25.85%
India (Nifty50)14.70%
Saudi Arabia (SASEIDX)0.35%
Brazil (IBOV)-0.63%
Mexico(MEXBOL)-17.98%
Source: Bloomberg

A Cheap Entry Point

Next, we wanted to get a feeling for the current relative cheapness of the JALSH VS history. We looked at many metrics to confirm that, despite the recent rally, our research shows that South African equities remain undervalued, and still offer a cheap entry point for new investors. The most compelling metric that outlines the relative cheapness of South African markets is evident in the price-to-book ratio.

To make our point, we consider a hypothetical example: Company X currently trades at a P/B ratio of 1.7, meaning the market is pricing the company at 1.7 times its book value. This number in isolation means little. What is more insightful is to look at where Company X has traded in terms of its P/B ratio over time. Let’s say that over the last 20 years, Company X's average P/B ratio was 2.25. With a current P/B of 1.7, this implies that Company X is trading at a 25% discount to its long-term average, offering a potentially attractive entry point. In this instance Company X is The Johannesburg All Share Index (JALSH). The JALSH index is currently trading at a P/B of 1.7, while its 20-year average sits at 2.25, suggesting that the JALSH is trading at a 25% discount. In simple terms, South African equities are still cheap by historical standards. On the other hand, the MSCI Emerging Markets Index is trading at a P/B ratio of 1.87, which is very close to its long-term average of 1.83. This suggests that the broader emerging markets are neither cheap nor expensive—just fairly priced. To put this into further perspective, let's examine the S&P 500 in the United States using the same approach. Currently, the S&P 500 is trading at a P/B ratio of five times, which is 67% higher than its 20-year average. This comparison highlights the relative value of South African equities, as the JALSH, trading at a significant discount to its historical average, looks incredibly cheap when measured against global markets such as the S&P 500.

Source: Bloomberg

The next critical question to address is whether South African equities are cheap for a reason. To explore this, we will examine various factors to assess the quality of the companies we invested in within the Arysteq SA Equity fund (ASAEF).

Quality Test

When examining the quality of South African equities in the ASAEF we focus on our top 10 holdings. On a weighted basis, the top 10 holdings in our portfolio has a debt-to-equity ratio of 42.7%, which is significantly lower than the benchmark’s 51%. This lower leverage indicates that these companies are managing their debt more conservatively, which positions them to better withstand economic volatility and market downturns. Additionally, all SA companies should benefit from the falling interest rate environment. We also note that their average current ratio of 2.1 versus the benchmark’s 1.8 suggesting that our top holdings are in a stronger liquidity position. They are better equipped to meet their short-term liabilities. This financial stability is a key factor in their ability to weather economic cycles and seize new opportunities as they arise. In terms of profitability, our portfolio’s normalised return on equity (ROE) outpaces the benchmarks by 0.8%. Finally, the best 12-month dividend yield of 3.4% versus the benchmark’s 3.3% demonstrates that even in a challenging environment, our top 10 companies deliver income to shareholders. This dividend yield, combined with the potential for capital appreciation, strengthens the overall investment case for South African equities.  These metrics collectively underscores some of the relative advantages of our holdings: they are more actively managed, more liquid, and offer better dividend yields, while trading at attractive valuations.

At Arysteq, we believe that as active managers, we can add value across all the holdings in our portfolio, not just the top ten, by diversifying not only across companies but also sectors. Markets are cyclical, and not every sector will perform well all the time. With global markets—especially the US—looking expensive compared to South Africa, we anticipate increased uncertainty and volatility. This creates a unique opportunity to purchase quality companies at prices below their intrinsic value. With South Africa's fundamentals improving, we believe the investment case for South African equities is highly compelling over the medium to long term. Investors are encouraged to revisit their portfolios and consider the benefits of diversifying into South African equities. Allocating to this market could unlock significant value over time. Invest with conviction, after all, no skin in the game means no gain. We’re convinced, are you?

Always Looking for Opportunities

Arysteq Asset Management offers and managers a diverse range of funds, from the Global Opportunity Fund to the Bond Fund, all underpinned by similar investment philosophies that guide our investment decisions. Opportunities are always around us, across sectors and geographies, and it is our job to find them. The latest addition to our fund selection, the Arysteq Property Fund, was launched after extensive research revealed the great opportunity for bond-like returns alongside capital appreciation, supported by improving property fundamentals and an attractive discount, the fund has been a success. Since its inception, it has delivered over 26% returns to shareholders and grown from N$500,000 just five months ago to more than N$55 million today. Much like our SA Equity Fund, we believe the Property Fund remains a quality investment at a discounted price.

For more information on any of our funds or to access further commentary, please visit our website at www.arysteq.com.

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