South Africa’s stellar stock market performance this year has investors buzzing about whether it’s time to put that market in the same category as its much bigger emerging markets counterparts, the BRICs, in the eyes of investors as well as formally, through its recent participation in the BRICS Forum.
South African share prices have been on a tear this year, generating returns that handily beat those produced by any of the the four original members of the “BRIC” emerging markets group – Brazil, Russia, India and China (in dollar terms, at least). Earlier this month, South Africa’s two major market indexes, the All-share index and the Top-40 stock index, both rose to hit record highs, powered by gains in everything from retailers like Woolworths to banks like FirstRand, while gold mining concerns like AngloGold Ashanti also have done well as nervous investors have gravitated to gold amidst market volatility.
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It isn’t likely that South African indexes will continue to rocket higher without any hiccups or pauses – that is simply illogical. Moreover, the tragic events of recent days – the deaths of 34 striking miners shot by police in during a confrontation at a platinum mine north of Johannesburg — has reminded us all too clearly that instability can lurk just beneath the surface in any emerging market.
But bracing oneself for events like this – or stories like the political corruption scandal dominating headlines about China – is part of what is involved in investing in emerging markets. Meanwhile, however, the MSCI South African index today trades at about 11.3 times the forward 12-month I/B/E/S earnings estimate for companies in the index. That’s a relatively modest valuation, given the big gains recorded by South African stocks this year, and is only slightly higher than the 10 year-average of 10.3 times 12-month forward earnings estimates. Still, it’s important to note that South African equities historically have tended to trade at a discount to other emerging markets.
As the chart below shows, on a forward P/E basis South Africa is now at its most expensive level relative to emerging markets since at least 1993 when the series began.
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South Africa doesn’t occupy the same powerful position in the global economy that belongs to the other members of the BRIC group, and in particular to China. Its GDP is a fraction of that of Russia; it isn’t one of the world’s largest economies. But it is an emerging market, and it’s an emerging economy with ties to a lot of its peers, including the BRICs. China, in particular, already has extensive business ties throughout sub-Saharan Africa, and other nations are looking for ways to expand business ties in the region. South Africa’s own economy will boom to the extent that those overseas enterprises view it as a logical first step toward greater involvement in Africa.
It may not yet be time to jump from BRIC to BRICS – but on the other hand, it may still be too early to jump ship in response to the recent surge in valuations, for those investors who already have invested heavily in South Africa. Nonetheless, investors who opt to jump aboard the trend now in hopes of profiting from the traditional growth trajectory of an emerging market – lots of consumers eager to spend – may want to take a more cautious approach in light of that increasingly pricey tone to the market.
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