South African Stocks Tipped to End Decade of Foreign Outflows

Momentum Investments projects a reversal of foreign outflows from South African equities, driven by capital shifts from the US to emerging markets, which will narrow the valuation discount relative to peers. Despite $6.3 billion in net outflows year-to-date, the FTSE/JSE Africa All Share Index has outperformed both the MSCI Emerging Market stock index and the S&P 500 in dollar terms this year, suggesting potential for further gains if foreign investment returns.

Analysis

Momentum Investments projects a pivotal reversal in foreign capital flows for South African equities, anticipating an end to the persistent net selling observed since 2016 and a consequent narrowing of their valuation discount compared to emerging market counterparts. Year-to-date, foreign net outflows from Johannesburg stocks have already reached $6.3 billion, as reported by JSE Ltd. Despite this significant selling pressure, the benchmark FTSE/JSE Africa All Share Index has notably outperformed both the MSCI Emerging Market stock index and the S&P 500 in dollar terms this year. This resilience suggests underlying fundamental strength or specific market dynamics attractive to certain investors, and implies that a shift towards net foreign inflows, as capital potentially reallocates from the US to select emerging markets, could act as a powerful catalyst for further appreciation in South African stocks.

Key Decisions for Investors

• Investors should closely monitor JSE foreign flow data for concrete signs of the projected reversal in outflows, as a sustained shift to net buying would validate the thesis for a rerating of South African equities.
• Given the current outperformance of the FTSE/JSE Africa All Share Index despite ongoing outflows, consider a tactical overweight position in South African equities, especially within a broader emerging market strategy anticipating capital rotation from developed markets.
• Evaluate the macroeconomic catalysts and relative valuation metrics that could drive capital from the US into emerging markets and specifically into South Africa, to assess the conviction behind Momentum Investments' outlook and the potential scale of inflows.