Ruven Naidoo: South Africa is cheap

“There is a disconnect between valuation levels in South Africa and other markets, so if we’re taking a long-term view, we’ll see value and opportunity.”
— Ruven Naidoo, Investec Bank Ltd

South African equities are cheap but, many would say, they are cheap for a reason. Earlier this year a dispute over the annual budget lasted months, nearly destroyed the governing coalition, and sent both stocks and the rand, South Africa's currency, plummeting.

Still, if you dig into the numbers, the discount pops out. South African equities on the Johannesburg Stock Exchange trade on roughly 10× forward earnings, significantly less than the 12.5x average for emerging markets and the 12x 10-year average in South Africa itself.

When we talk about “10× forward earnings,” we’re saying we are willing to pay $10 today for every dollar of profit a company is expected to earn over the next twelve months. A lower multiple signals the expectation that the company will grow more slowly than stocks selling at higher multiples.

A low price doesn't necessarily mean a good value. In South Africa, stocks may be cheap, but the reality is that power cuts can knock factories offline, unemployment hovers near a bruising 33%, and he cost of crime to the country is equivalent to nearly 10% of economic output.

On the other hand, South Africa can also present an unexpectedly upbeat story. South Africa has begun attracting serious capital into its power sector and renewables, including $1.5 billion from the World Bank. South Africa’s vast mineral reserves, especially platinum group metals, manganese, and lithium, position it well in a world racing to secure the building blocks for artificial intelligence, electric vehicles, and alternative supply chains.

On the equity side, South African mining stocks are coming back in favour, buoyed by rising global demand and competitive valuations, and dividend yields are attractive. Bloomberg estimates a yield of 6.8% for the Johannesburg Stock Exchange All Share Index, which will appeal to income-focused investors.

So yes, South Africa looks cheap and is paying out generous dividends. Ruven Naidoo is right about that. But the market also has its problems. Investors have to decide for themselves whether they feel the country's equities are priced correctly or represent good value.

Miss a column? Wander over to www.mydailyoracle.com and catch up, then watch for the next note in your inbox. For a deeper dive into emerging Africa, read Africa's Business Revolution: How to Succeed in the World's Next Big Growth Market by Acha Leke, senior partner in McKinsey's Johannesburg office and Chairman of the consulting firm's Africa region.

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