Back to Media

Investing in South Africa? Stocks are undervalued but risk is high

September 20, 2024

South Africa (SA) is a country that has had its reputation tarnished in recent years. Nevertheless, it can be interesting for financial investors and traders. This is because it is one of the non-European economies that offer some interesting investment opportunities.

 Investing in South Africa? Stocks are undervalued but risk is high

Decent growth but high unemployment

The South African economy underwent a relatively rapid boom at the beginning of the millennium, which was replaced by stagnation and decline. The country's economic level, expressed in terms of gross domestic product (GDP) per capita at purchasing power parity, ranks South Africa as high as 115th in the global rankings with less than $16 000. Despite this, South Africa is one of the most developed countries on the African continent. However, the country is plagued by a huge unemployment rate of almost 28% and inflation of almost 5%, although it has been falling in recent years. South Africa's economic growth is estimated at 1.6% for this year and 2.6% for 2025. These are rates comparable to the Czech Republic. The fact is, however, that investing in South Africa carries relatively high risks, mainly stemming from the country's political instability.

The stock market directly or through ETFs

Let's take a look at the potential investment opportunities in this African country. The national currency of South Africa is the South African rand (ZAR). Its exchange rate against the US dollar has mostly fluctuated between 14 and 18 ZAR to the dollar over the past five years.

The rand reached its strongest level during this period in early May 2021, when one US dollar could be obtained for 13.35 ZAR. Since then, however, the rand has weakened significantly to the current 17.75 ZAR to one dollar. This represents a depreciation of approximately 33%. Over the past year and a half, however, the South African currency has been essentially stable against the US dollar.

Snímek obrazovky 2024-09-23 v 11.07.14

Evolution of the rand-dollar exchange rate over the last 5 years; Source: Investing.com *

The index has earned over 50 % in 5 years

From a retail European investor's perspective, it therefore makes sense to invest in South African company shares. The main stock market in South Africa is the Johannesburg Stock Exchange. The main index of this market is the SA40 index. As the name suggests, the index is made up of the shares of the 40 most valuable companies traded on the exchange. A total of 274 companies are traded on the Johannesburg Stock Exchange.

For those who are not very familiar with individual stock titles but still want to have South African stocks in their portfolio, investing in an ETF that replicates the main SA40 index would be recommended. Its performance over the past five years has been approximately 51 %. However, the performance over the past year is only about 9 %.

Snímek obrazovky 2024-09-23 v 11.07.38

Performance of the SA40 index on the Johannesburg Stock Exchange over the last 5 years; Source: Trading Economics*

These are the top 5 best performing stocks

In terms of individual stocks, MR Price Group Ltd has been the best performing company on the Johannesburg Stock Exchange over the past year, with its shares appreciating by more than 80 % over the past 12 months. It is a retail company and investment recommendations experts strongly recommend buying this stock.

Snímek obrazovky 2024-09-23 v 11.08.05

MR Price Group's stock performance over the past 5 years; Source: Investing.com *

The next four places are followed by shares of Capitec Bank Holdings Ltd (77.08 % valuation for the year), Anglogold Ashanti Plc (52.21 %), Multichoice Group, Ltd (43.44 %) and Nepi Rockcastle, n.v. (41.7 %).

Snímek obrazovky 2024-09-23 v 11.08.26

Top 5 best performing stocks on the Johannesburg Stock Exchange (% change over the last 12 months); Source: TradingView.com *

However, the five-year rankings are significantly different, and of the previous top five companies, only banking house Capitec Bank Holdings, Ltd. is still in the top five, with its shares gaining almost 147 % over the past five years. The five-year ranking is led by mining company Gold Fields, Ltd. with a performance in excess of 243 %. It is followed by Shoprite Holdings, Ltd. (147 %), the aforementioned Capitec Bank Holdings, Investec, Plc. (126.93 %) and Investec, Ltd. (123.12 %).

Snímek obrazovky 2024-09-23 v 11.08.53

Top 5 best performing stocks on the Johannesburg Stock Exchange (% change over the last 5 years); Source: TradingView.com *

Mineral extraction is a key sector

South Africa is also a major exporter of commodities. Gold is the absolute number one export, followed by platinum, coal briquettes and diamonds. From an investment point of view, it appears advantageous to track the performance of the shares of companies involved in commodity mining. Within the Johannesburg Stock Exchange's main index we find the shares of the following mining companies: Anglogold Ashanti, Plc, Anglo American, Plc, Impala Platinum Holdings, Ltd, Gold Fields, Ltd, BHP Group, Ltd, Northam Platinum Holdings, Ltd, Sibanye Stillwater, Ltd and Anglo American Plat, Ltd. However, the best performing company at the moment is the aforementioned Anglogold, whose shares have gained over 52 % in the last 12 months.

Snímek obrazovky 2024-09-23 v 11.09.16

AngloGold's stock performance over the last 5 years; Source: Investing.com *

In conclusion, although South Africa is a democracy, its prosperity has been threatened by political instability for many years. Therefore, some experts argue that South African equities are undervalued compared to other comparably developed countries. This may be a realistic picture of the situation, but it is important not to forget the political risk that exists in South Africa.

Commentary by David Matulay, Analyst at InvestingFox

Warning! This marketing material is not and should not be construed as investment advice. Past data is not a guarantee of future returns. Investing in foreign currency may affect returns due to fluctuations. All securities transactions may result in both gains and losses. Forward-looking statements represent assumptions and current expectations that may not be accurate or are based on the current economic environment, which may change. These statements are not guarantees of future performance. InvestingFox is a trademark of CAPITAL MARKETS, o.c.p., a.s. regulated by the National Bank of Slovakia.

* Past data is not a guarantee of future returns.

** 5-year stock performance charts:

https://www.investing.com/equities/caphold,

https://www.investing.com/equities/multichoice,

https://www.investing.com/equities/gold-fields-ltd,

https://www.investing.com/equities/shoprite-holdings-ltd-(j),

https://www.investing.com/equities/investec?cid=41370

InvestingFox is a trademark of CAPITAL MARKETS, o.c.p., a.s., with its registered office at Slávičie údolie 106, Bratislava – Staré Mesto district, 811 02. The company is registered in the Commercial Register of the Municipal Court Bratislava III, Section: Sa, File No.: 4295/B, ID No.: 36 853 054, VAT No.: 2022505419.

CAPITAL MARKETS, o.c.p., a.s. is a securities dealer pursuant to Section 55(1) of Act No. 566/2001 Coll. on Securities and Investment Services and on Amendments to Certain Acts, as amended (hereinafter the “Securities Act”). On October 30, 2007, CAPITAL MARKETS, o.c.p., a.s. was granted, by Decision No. OPK-2297/2007 of the National Bank of Slovakia -PLP, a license to provide investment services pursuant to Section 54(2) in conjunction with Sections 59(2) and (3) of the Securities Act, which was extended in accordance with the provisions of the Securities Act by Decision No. OPK-1830/2008-PLP dated April 21, 2008, Decision No. OPK-11601-1/2008 dated January 28, 2009, Decision No. ODT-5059-3/2012 dated July 23, 2012, and Decision No. ODT-9332/2014-1 dated October 21, 2014.

Read more

Mercedes-Benz: New strategies on the road to European market recovery

Mercedes-Benz: New strategies on the road to European market recovery

March 3, 2025

Mercedes-Benz's recent financial results show that last year it faced the harsh reality of a slowing transition to electric vehicles and declining demand in China, once an inexhaustible source of profits for German carmakers. Its difficulties reflect a difficult period during which European carmakers have had to cope with a sharp drop in sales, particularly in the electric car segment. However, the first sales data this year suggest an improvement, which could be the first sign of a market recovery.

Coca-Cola shows resilience to macroeconomic challenges

Coca-Cola shows resilience to macroeconomic challenges

February 23, 2025

Coca-Cola, the global leader in soft drinks, best known for its Coca-Cola brand, has released its fourth quarter 2024 financial results, which not only exceeded Wall Street's expectations but also confirmed steady growth in demand for the company's products despite challenging macroeconomic conditions.

Gold's golden age: High buying volumes and record prices have pushed the value of demand to an unprecedented $382 billion

Gold's golden age: High buying volumes and record prices have pushed the value of demand to an unprecedented $382 billion

February 16, 2025

The price of the yellow metal jumped 27% last year, and at the end of October, when it set a new record of just under $2,800 per troy ounce, it had risen as much as 35% since the beginning of January. Now an ounce is even worth around $2 900. The continuing gold rally reflects strong demand, which rose by one per cent last year to a record 4,974.5 tonnes. Interest in investment gold jumped, demand for the metal for technological uses was also strong and central banks continued their massive purchases, according to data from the World Gold Council.

Translated with DeepL.com (free version)