. . . And what might change their minds?
Up to the end of last week, foreigners had been net sellers of R25,6 billion worth of shares on the JSE so far this year. This compares with net foreign purchases of R30,1 billion over the equivalent period in 2018.
This is despite emerging markets overall seeing meaningful inflows. According to figures from the Institute of International Finance, emerging market assets attracted $25,1 billion (R362,3 billion) of non-resident flows in March, $31,2 billion (R450,4 billion) in February, and $52,6 billion (R759,2 billion) in January.
This would seem to suggest that international investors have a particular aversion to South African assets. The country is not seeing the kind of money that is being directed to its emerging market peers.
The global environment
However, Archie Hart, the lead portfolio manager for the Investec Emerging Markets Equity strategy based in the UK, believes this should be viewed in context. One should be cautious about reading too much into short-term market movements.
He notes that the end of 2018 was very bad for markets around the world, but the start of 2019 has been much better. The performance of the JSE has followed this trend, despite net foreign outflows.
“If you look at markets as at the end of June 2018 compared to where they are today, emerging markets are up 3 percent in that 10-month period; South Africa is up about 3 percent in local currency; and developed markets are up about 4 percent,” Hart points out. “So, actually, over 10 months, markets are slightly up. But it’s a low growth picture globally, coupled with a fair amount of volatility and uncertainty. I’m not sure that what we’re seeing in South Africa is too different to what we’re seeing elsewhere.”
Last year was also one of the worst in history for corporate earnings expectations. Around the world, the projected earnings of listed companies were revised substantially downwards.
“South Africa was no different,” Hart says. “From the start of 2018 to the end of the year, analysts downgraded their earnings expectations for corporates by around 20 percent. That sounds like a lot, but it’s fairly similar to what we saw in the rest of the world.”
The questions foreigners are asking
The challenge for investors globally, therefore, is trying to identify where future returns might come from. In this respect, South Africa has some well-recognised challenges.
The local economy is weak, there is still a degree of political uncertainty leading up to next month’s election, and, following the collapse of Steinhoff, concerns have been heightened about corporate governance. The dramatic declines in the share prices of Aspen and MTN have also led to questions being asked about local management teams. It is also significant to international investors that local companies are being extremely conservative with their balance sheets. They are not investing because of the weak economic environment.
“Businesses in other emerging markets are stacking up more favourably for foreign investors because they are still investing,” says Thokan. “So they are likely to deliver better earnings growth going forward.”
This is a sentiment shared by hart
“The problem we have is the growth outlook is pretty weak,” he says. “Consumers are taking on quite a bit of debt, they don’t have much scope to go out and spend, which means that it’s tough to find growth in the consumption part of economy. At the same time, the banks are facing issues from low economic growth, but also of disruption, most obviously from Capitec but also new start-ups.”
He is less concerned about the robustness of local corporate governance and management.
“There have been a few particular corporate governance issues, but if you look broadly at the overall market, the corporate governance framework, reporting and disclosures are certainly a whole lot better than some other emerging markets that I look at,” says Hart. “Corporates are actually in reasonably good shape, notwithstanding those examples.”
How sentiment might shift
It is therefore not a question of quality, but of growth. This has only been compounded by the lack of a consistent power supply from Eskom.
Foreign investors are largely, therefore, “on-hold” with regards to South African assets at the moment. There is however potential for this to change after next month.
“The market has an expectation that (President Cyril) Ramaphosa and ANC will win the election, and then what you need to see is significant progress on economic reform, whether that’s state-owned enterprises or the economy generally,” says Hart. “And that can be very powerful if they look to execute that.
“A good example is Brazil where we have a new, reform-minded government and markets have performed extraordinarily well in a short space of time, even without any evidence that execution will be strong,” he points out.
“So I would say the market does have some potential sources of upside, but only if we get strong policy direction post the elections.” — Moneyweb.