As we head into 2025, South Africa’s political and economic landscape is providing the foundations for an uptick in GDP growth that we haven’t experienced in over a decade. This growth has not yet been incorporated into earnings expectations of domestic SA companies, presenting an exciting opportunity for upside returns in the SA equity markets. It’s in this context that we see the potential for low to mid-teens returns in domestic equities in 2025.
The Outlook Brightens
How Can We Get There, and is it Realistic?
To achieve this anticipated growth, two key drivers stand out: Household Consumption Expenditure and Gross Fixed Capital Formation (GFCF). Assuming the government maintains its spending trajectory at a steady pace, growth hinges on higher household consumption and increased private and public sector investment. In this context, a 2% GDP growth scenario in the near term is not far-fetched but firmly within reach.
Why 2025 Marks a Turning Point
While South Africa’s last period of consistent GDP growth occurred between 2016 and 2018, those years were shaped by a vastly different set of circumstances. Comparing the two periods offers insights, but 2025 emerges as a year of unique opportunities. Key drivers of economic momentum have shifted substantially, providing fertile ground for optimism across markets.
The Catalysts for the 2025 Economic Case – Now vs Then
Government – A Steady Hand Drives Optimism
2016-2018
- The transition from the Zuma era to “Ramaphoria” sparked hope but came with uncertainty. Markets grappled with whether new leadership could undo years of damage to the economy.
2025
- The emergence of the “GNU dawn” has created stability, encouraging long-term strategic decisions by both businesses and individuals.
- Improved collaboration between the government and private sector fuels this optimism, laying the groundwork for sustained growth
Business Confidence – Moving in the Right Direction
2016-2018
- Business confidence was volatile, ultimately trending downward amid concerns over political instability and an uncertain growth trajectory.
2025
- Business confidence surged after the May 2024 elections, charting a clear upward trajectory, though it remains in negative territory. Markets are optimistic about continued improvement.
Eskom – Turning the Lights on for Good
2016-2018
- Loadshedding eased temporarily, boosting sentiment. However, this was driven by lower demand rather than sustainable operational improvements, leaving Eskom’s systemic issues unresolved.
2025
- South Africa celebrates over 300 days without loadshedding, with energy reliability becoming a cornerstone of economic recovery.
Transnet – Building Momentum
2016-2018
- Governance failures, corruption, and operational inefficiencies weighed heavily on Transnet’s reputation and performance, setting the stage for its decline in subsequent years.
2025
- Transnet has shown signs of recovery, with improved rail freight volumes and reduced port delays. While private sector partnerships are critical to maintaining progress, the trajectory is encouraging, albeit gradual.
Inflation – Stable and Supportive
2016-2018
- Inflation remained under control, averaging around 4.6%.
2025
- Inflation remains well below medium-term guidance. While it is expected to rise slightly in early 2025, it remains manageable, creating room for potential rate cuts to stimulate the economy.
The Repo Rate – Less Relief, but Still Positive
2016-2018
- The SARB’s ability to cut rates was constrained by political uncertainty and the weakening of key state-owned enterprises, leaving inflation and currency control as the primary focus.
2025
- Global trends, including the re-election of US President Donald Trump and its inflationary implications, have tempered expectations for rate cuts. Locally, the MPC is likely to prioritize currency stability despite low inflation levels. Even so, the possibility of one or two rate cuts remains a welcome boost for South Africa.
The South African Consumer – Resilient and Ready
2016-2018
- Consumer confidence oscillated, improving post-Ramaphosa’s election.
2025
- Consumer resilience remains strong, driven by rising employment, salary increases, and added liquidity from retirement reforms like the two-pot system. Retail sales are projected to show stable growth throughout 2025
Credit Demand – Poised for Growth
2016-2018
- Credit demand declined toward the end of the Zuma era but rebounded as Ramaphosa assumed leadership.
2025
- Credit demand remains muted but holds potential for an upswing as economic conditions improve. A lower rate environment, even with modest cuts, could spark increased borrowing, further fuelling GDP growth.
Multiplication Before Addition
The ALSI closed FY24 11% higher, driven largely by SA Inc. while miners lagged. Globally, South African equities remain attractively priced, with forward PE multiples offering compelling value compared to other emerging markets and the S&P500.
The market’s robust rally has pushed certain multiples above their 10-year averages, particularly in sectors like retail, where premiums are now prevalent. This raises important questions about sustainability and what’s factored into current valuations.
Two Key Questions to Consider
1. What’s Baked into the Valuation?
It’s all about the multiple
At the start of 2024, the market was pricing in the absolute worst for SA Inc. From a valuation perspective, SA Inc appeared cheap and the step change in our operating environment in 2024 saw markets take advantage of the attractive valuations pushing prices and multiples higher. Breaking down the performance reveals it was primarily driven by multiple expansion, rather than earnings growth. In simpler terms, while analysts adjusted target prices upward on the back of an improved outlook, their expectations for earnings growth remained largely unchanged.
This indicates the market is pricing in an improved economic outlook, but without concrete adjustments to earnings forecasts. Looking ahead to 2025, the next leg of growth in domestic equity will be led by earnings upgrades.
2. Is a 10-Year Average Multiple Still Relevant in Today’s Conditions?
While we expect earnings revisions to come through, it’s also worth questioning whether 10-year multiples remain a valid benchmark. The economic environment over the past decade was marked by volatility and stagnation, making it less comparable to today’s landscape of potential sustainable growth.
Assuming price remains constant, what would we need to see happen to earnings to normalise current forward multiples to their 10-year averages? Retailers, currently in premium territory, would need to see earnings grow by 1.8%, yet consensus is pricing in 10.8% growth. Banks and Industrials are in discount territory and to normalise, earnings would need to decline, despite teen growth expectations from consensus. This scenario appears disconnected, which begs the question whether premium multiples may be more appropriate in specific sectors under the new growth environment.
Why Are Earnings Projections Lagging?
South Africa’s new GDP trajectory represents uncharted territory. This is clear when looking at the different forecasts for GDP growth. Excluding post pandemic growth, the lowest GDP projection for 2025 is almost equivalent to the highest level of GDP growth achieved over the past decade. Furthermore, the forecasts show significant dispersion between the highest and lowest. In percentage terms this may appear small being a 0.5% variation. However, this translates into roughly R40bn in potential GDP growth.
Clearly there is a significant amount of uncertainty as to where we will end up from a GDP perspective which filters through into underlying earnings expectations. Market participants are choosing to wait for tangible evidence of growth in actual GDP data and corporate earnings before committing to updated earnings forecasts.
Foreign Investors Stay on the Sidelines
Foreign investors remain hesitant to re-engage with South African assets. Having been burned during the “Ramaphoria” period in 2018, they are taking a wait-and-see approach for 2025. While outflows have slowed, foreign participation remains muted.
That said, the eventual return of foreign flows could act as a powerful tailwind for local equity markets, though this is unlikely to materialize in the immediate term.
Potential Surprises on the Horizon
The market is never clear cut and there will always be factors outside of the immediate investment thesis that may play a role in how the year unfolds. 2025 is not without its own “identified uncertainties” where the potential for risk/reward is clear but the ultimate impact and timing remains to be seen.
Several key factors could adjust the narrative in 2025:
- Trump’s Return: To be determined, yet preliminary concerns for SA remain linked to inflation, the FED and the MPC’s corresponding response.
- GNU: A collapse of the GNU may have the potential to derail the recovery outlook.
Water Infrastructure: Addressing water supply and quality challenges remains a challenge and problems may come to the fore. - China’s Recovery: On a positive, all the negativity is priced in, and any new stimulus announcements will be well received by the local market, resource names being the primary beneficiaries.
Conclusion
In the simplest terms, the multiplication has occurred; now we await the addition to earnings. South Africa’s economic climate supports stronger GDP growth, with the necessary drivers in place to sustain this momentum. While the market has already priced in some optimism, analysts and investors remain cautious about making aggressive earnings upgrades due to the lack of comparable growth environments.
As the economic recovery gains traction and translates into corporate earnings, confidence in future growth will strengthen, and the market will adjust accordingly.
The potential for low to mid-teens growth in SA equity remains firmly on the table, with upside surprises likely as earnings expectations begin to reflect the improving environment. For investors, the key is to be positioned appropriately to benefit from this ongoing recovery.