It’s been an unsettling week for investors in South African stocks.
Late last week, the country’s increasingly unpopular president, Jacob Zuma, unceremoniously sacked his well-regarded finance minister, Pravin Gordhan, and other dissident cabinet officials in a transparent power grab – replacing them with long-time loyalists. Gordhan and Zuma had clashed repeatedly over the latter’s links to the politically influential Gupta family and the management of state-owned enterprises. Gordhan’s ouster not only leaves the Treasury without a proven hand at the tiller, it removes one of the government’s strongest proponents of transparency.
Predictably, the news triggered a 4% plunge in the value of the rand versus the dollar. And it will almost certainly result in South Africa’s credit rating being downgraded.
So, while the headlines are dour for the moment, we remain bullish on South African stocks over the long-term.
The Johannesburg Stock Exchange (JSE) has seen it all over the past thirty years.
The revolt against apartheid. Namibian independence. Right-wing attempts to subvert the nation’s first democratically elected government. The HIV/AIDS crisis. Paralyzing labor strikes. Corruption charges against Zuma. The collapse of commodity prices. A debilitating electricity shortage. Long-standing drought.
But thanks to a strong civil society, a free and vocal press, and an independent judicial system, the Rainbow Nation has remained resilient.
And, through it all, the JSE has marched higher – not without a few hiccups, however – but few markets have been better wealth creators.
Over the past twenty years, the JSE All Share Index has climbed 169% in US dollar terms. That’s an annualized rate of 5.1% – and not far off from the S&P 500 Index’s 5.9% yearly return over the same timeframe.
But, while US stocks now exhibit a cyclically adjusted price-earnings ratio (CAPE) of nearly 29 – suggesting the market is priced for near-perfection – the JSE’s CAPE stands at a much more sober mark of 18.
Our holdings in South Africa boast world-class management teams with a proven ability to navigate the challenges posed by South Africa’s tumultuous political environment.
Jacob Zuma was elected president in May 2009. During his politically disastrous tenure, Shoprite Holdings’ has increased its sales by nearly 140%. Calgro M3’s earnings have increased by a factor of 27. And EOH’s share price has surged from R6.00 to R139.00.
So, while no market prognosticator can tell you with any certainty whether the JSE will rise or fall over the next one to two years, we’re confident that the next decade will prove rewarding to patient holders of South African stocks.
Africa Capital Group LLC
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