Today’s menu

• South Africa’s decline

• The secret bull market

• How did that happen?

• Conclusion

South Africa's decline

There is a negative perception around South Africa and it has been around for a while. That perception came from years of self-inflicted problems, such as infrastructure decline, corruption and crime.

Investors shun markets with these problems. Accordingly, for years, the South African stock market delivered poor returns. Between January 2015 and January 2020 (just before Covid hit), the South African stock market delivered nominal returns of 4.67% per year. The inflation rate was 5.13% in that same period.

In economics if you remove inflation from the nominal return, you get what is called the real rate of return. The real return in South Africa in that period was approximately -0.46% per annum.

Not good.

Understandably, South Africans started investing in higher returning foreign markets and foreigners ignored South African markets. This exacerbated poor market performance.

The secret bull market

Then almost unnoticeably something happened.

The market started going up.

Below we have three graphs from 2020 to 2025, they show three South African stock market indexes (or indices):

1. JSE Top 40 index - which tracks the forty largest companies on the Johannesburg Stock Exchange.

2. JSE Industrial 25 index - which tracks 25 industrial stocks.

3. JSE Financial 15 index - which tracks 15 financial stocks.

Here is the five-year performance for each index:

• Top 40 index - 16.4% per annum

• Industrial index - 15.4% per annum

• Financial index - 21.1% per annum

How did that happen?

Good question, because the narrative around South Africa has not changed, but the markets are rising.

Those are all fantastic 5-year returns and they are even more spectacular over 1-year.

If you owned those three indices equally, your 1-year return would have been 24.5%. By comparison, the S&P 500 would have given you 10.6% and the Nasdaq would have given you 12.4%.

South Africa is outperforming the hottest markets in the world.

Who would have thought?

Rand-Dollar exchange rate

You have to be careful when comparing Dollar indexes against Rand indexes because of the effect of exchange rates.

Over the past 5-years the Rand-Dollar exchange rate has not changed much at all. But that is not usually the case.

The graph below is the Rand-Dollar exchange rate from April 1994 to now. That is the 31-year period during which South Africa has been a democratic nation. As you can see the Rand has consistently weakened against the Dollar. On average it weakens by 5% per annum.

That means, if you invest in South Africa and want your wealth to grow in US dollar terms, you have to earn 5% more in South Africa than in the USA.

Let’s compare South African returns (average of the three indices) over different time periods to the S&P 500. We’ll compare the returns in Dollars.

Clearly, a small bull market has emerged in South Africa over the past 5-years. But, over a 10-year period, it was devastating to be invested in South Africa, while the S&P 500 soared.

Conclusion

What do we think of the recent South African bull market?

We’re not too concerned with the market as a whole. Rather, we are interested in what rising indices tells us about South African stocks.

Which is that if the indices are going up, then most of the companies that make up the indices are also going up. In market-speak, this is called momentum and it is one of the most powerful drivers of performance. In simple terms, when prices start rising, they tend to gain inertia and keep rising.

No matter how much fortitude you have, as an investor, it is pretty tough to own stocks that have low return, especially when you could have bought an index and tripled your money in a decade (as depicted in our table above).

That made South Africa a hard place to invest. But now that investors have recognised that there are opportunities in the South African market, capital is coming back and the market is rising.

That makes it easier for us to invest in extraordinary South African companies. When you buy a good company and the market rewards its performance with a rising stock price, it is easy and fun to remain invested.

This is a very important lesson for an investor - if the wind is at your back, your investment journey is easy. Whereas if you’re investing against a proverbial headwind, it tests your patience; makes you question your investment strategy and leads to investing mistakes.

I would like to hear what you’re up to.

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