The South African stock market, like many emerging markets, is not always a perfect reflection of the health of the domestic economy. This is due to several factors, including the large weighting of multinational companies in the index and the influence of global factors.
One of the main reasons why the South African stock market is not as closely linked to the South African economy as some might expect is the fact that many of the largest companies listed on the Johannesburg Stock Exchange (JSE) are multinational corporations that derive a significant portion of their earnings from outside of South Africa. These companies, known as "Rand hedges," are able to benefit from a weaker Rand, even when the South African economy is struggling.
The offshore exposure from "Rand hedges" of some of the largest earners in the ALSI. As you can see, many of these companies, including Naspers, Anglo American, and Standard Bank Group, generate a significant portion of their earnings from outside of South Africa. This means that the performance of these companies can be more closely tied to global economic conditions than to the health of the South African economy.
The above chart suggests that there isn't always a clear correlation between the two. For instance, in 1949, the South African economy experienced a real GDP growth of 2.3%, whereas the South African equity market saw a total return of 28.1%. Conversely, in 1998, there was a real GDP growth of 0.5%, yet the South African equity market had a negative total return of -5.9%. This data appears to support the notion that the South African stock market is not necessarily a perfect reflection of the health of the South African economy.
With the upcoming 2024 elections in South Africa poised to be the most contested in recent history, and potential for political uncertainty, investors might be concerned about the impact on the stock market. However, as we've seen throughout history, the JSE's performance can be somewhat decoupled from the immediate state of the domestic economy. This is due to the reasons mentioned above, particularly the multinational nature of many large companies and the influence of global factors. While political developments can certainly cause short-term volatility, a strong showing by certain parties or a change in government policy might not necessarily derail the stock market in the long run.
Investors should still be mindful of the political landscape, but the historical disconnect between the JSE and the South African economy offers a reason for cautious optimism.