Momentum Investments economist, Sanisha Packirisamy, advocates for South African investors to prioritize local asset classes over offshore investments this year. She points to more attractive valuations and the potential for rand appreciation as compelling reasons for this shift.
According to Packirisamy, the valuation metrics of the local equity market have reset to consistently lower levels since the onset of the Covid-19 pandemic. Notably, South African equities currently exhibit a 46% premium in long-term average dividend yield compared to emerging markets, significantly higher than historical norms. Additionally, the country’s forward price-to-earnings (P/E) ratio stands at a 24% discount to emerging markets, a considerable deviation from the usual 2% discount.
Despite South Africa’s return on equity relative to emerging markets being slightly above historical averages, Packirisamy highlights that the country’s relative price-to-book (PB) ratio is at all-time lows, presenting a 10% discount to emerging markets. She emphasizes that South African equities appear undervalued not only in comparison to the global universe but also against their historical performance.
Packirisamy attributes the significant risk premium attached to the South African equity market in recent years to concerns about the country’s subdued economic growth prospects. Factors such as inconsistent electricity supply and transportation network degradation have contributed to a pessimistic outlook, leading to a sentiment discount on local-listed companies.
However, she notes that local equities are currently under-owned by both local and global portfolio managers, suggesting potential for rerating if there are positive surprises in domestic economic growth. Despite domestic multi-asset fund managers holding a relatively low local equity weighting, Packirisamy highlights South Africa as the fifth most under-owned market within global emerging market equity funds, indicating significant rerating potential from current undervaluations.
Deutsche Bank research cited by Packirisamy underscores the disparity between the local equity market’s profit generation and its market capitalization compared to global counterparts. Despite producing similar profits to Amazon, the South African equity market’s market capitalization is around six times smaller.
