South Africa’s Beaten-Down Stocks Deserve a Second Look

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South African stocks have underperformed for a long time—a really long time. “In dollar terms, our market is in the same place it was in 2005,” says Duncan Artus, chief investment officer at Allan Grey in Capetown.

This year is different. The

iShares MSCI South Africa

exchange-traded fund (ticker: EZA) has gained 14%, while global emerging markets are about flat. One reason is that South Africa produces 80% of the world’s platinum group metals, which have surged to six-year highs as industrial demand rebounds globally. That has lifted stocks such as

Impala Platinum Holdings

(IMP.South Africa) and

Sibanye Stillwater

(SSW.South Africa).

But it isn’t the only good news for the nation of 60 million. “Other commodity-heavy markets like Brazil or Colombia have not performed well this year,” says Marco Spinar, a portfolio manager with the Neuberger Berman Emerging Markets Equity fund. “Other factors are affecting South Africa.”

One of them is Covid-19. Reported cases and deaths have plunged almost vertically from a January spike. Politics are nudging in the right direction: Reform-minded president Cyril Ramaphosa ousted a key rival, Ace Magashule, as secretary general of the African National Congress.

Ramaphosa has run a tight fiscal ship, too. Moody’s rating agency skipped a review this month, taking any downgrade off the table, and the rand, South Africa’s currency, grazed a two-year high against the U.S. dollar. That makes yields above 9% on 10-year South African bonds look enticing, Artus says.

“I think South African macro is pretty adequate, but most investors I talk to think it’s pretty weak,” says David Aserkoff, head of equity strategy for emerging Europe, Middle East, and Africa at

J.P. Morgan.

As weak perception catches up to not-so-weak reality, lagging financial and consumer stocks may catch an updraft. Aserkoff and Spinar both favor

Capitec Bank Holdings

(CPI.South Africa), a smaller player whose digital reach is growing fast. Artus likes

Standard Bank Group

(SBK.South Africa), which has the top pan-African franchise. The whole banking sector provisioned heavily last year, as the pandemic raged, leaving it poised for profit boosts on a recovery, adds Louis Lau, director of investments at value-oriented Brandes Investment Partners. “We like the South African banks,” he says.

Among other consumer-facing names, Aserkoff is bullish on

Bidvest

(BVT.South Africa), a conglomerate with businesses from office cleaning to car rentals, and telecom

MTN Group

(MTN.South Africa). MTN’s shares have climbed 60% this year, but have further to run after a long previous decline, he maintains.

Artus adds multiprofile investment holding

Remgro

(REM.South Africa) and retailer

Woolworths Holdings

(WHL.South Africa), which in South Africa targets upscale consumers.

South Africa still faces daunting challenges. Annual economic growth has crept along at 1%-2%…