SA Equities — Beyond the Gloom

South Africa's stock market has endured a challenging decade marked by sluggish economic growth, policy uncertainty, and capital flight. The advent of the GNU brought with it the prospect of political stability, and the market subsequently rerated. Recently, tariffs and GNU-worries have again seen certain SA Inc. counters retrace. Portfolio manager WIM MURRAY looks at some exciting long-term opportunities now on offer for discerning investors. 

Post-GNU optimism rewarded South African-focused stocks in 2024. Cooling inflation, improved political stability, and a resilient rand boosted investor appetite. Financial and industrial shares listed on the JSE Limited gained approximately 20% last year. With various counters approaching fair value and prompting prudent profit taking, the Foord Equity Fund entered the year with ample cash. 

Today we see numerous attractive opportunities — particularly among smaller, overlooked companies boasting robust balance sheets and proactive management. As the market continues to focus on the large and highly liquid top 40 shares, these smaller businesses remain overlooked despite offering attractive long-term value.

At Foord, our investment approach hinges on fundamental analysis and valuation discipline. We eschew labels like ‘growth’ or ‘value’ and remain focused on the quality, sustainability, and growth potential of a company's cash flows. Management quality and disciplined capital allocation further underpin our investment conviction.

Headline inflation currently sits comfortably in the 3-6% target range, aided — until recently — by rand strength, lower fuel costs and stable food prices. Looking forward, we expect inflation to edge higher, reaching 4.5-5.0% within the next 12 to 18 months. Risks include a possible VAT hike, renewed rand weakness, exploding sovereign debt, and global inflationary pressures from the tariff war. Inflation is negative for consumer spending, even if it helps government’s finances.

South Africa’s economic activity remains subdued despite nascent improvement in business confidence indicators. Investment in infrastructure remains at historically low levels, and private sector credit growth is weak. Corporate capital spending is primarily maintenance-driven rather than expansionary. Achieving GDP growth of 1.5-2.0% this year, from a very low base, would be notable progress.

Nevertheless, select companies continue to provide fertile opportunities. Companies capable of delivering earnings growth through internal efficiencies and increased market share, independent of macroeconomic tailwinds, remain highly attractive. Notable examples include WHBO — the resilient industry leader, now benefiting from its unique market position, favourable contract terms, and improving margins; and Premier Group — which remains attractive on improving operational efficiencies and margin expansion.

Within the resources sector we remain constructive on copper producers, driven by electrification trends and limited new supply, as well as on gold, as a defensive hedge. We are cautious on iron ore producers — given weak Chinese demand and structural property-market pressures — and platinum group metals (PGMs), due to uncertainties surrounding global vehicle sales and emission regulation delays.

Despite macroeconomic challenges and ongoing risks, South Africa’s equity market still holds substantial promise for discerning and patient investors. Foord’s forward-looking long-term investment approach positions us to capture value that others might overlook. We remain cautiously optimistic on the SA equity asset class — selectively investing beyond the gloom into SA Inc companies that should survive and thrive.