South African investors face five pivotal themes in 2025: AI advancements, Trump’s presidency, China’s economic trajectory, M&A activity, and the state of the government of national unity. Tim Cohen from Currency explores the key stocks to watch in this landscape, from Naspers and EOH to Thungela and Sun International.
Highlights:
- Exporters like Sun International and Thungela may benefit from a stronger dollar and relaxed ESG pressures.
- Growth forecasts are steady, but China’s policies could shape mining stocks and trade dynamics.
Well, there is a question. Let’s break it down.
The imponderable as far as AI is concerned is whether any South African company is at all positioned to take advantage of the global move to AI and, if so, which one would benefit most. On the international front, many if not most of the companies that will benefit from AI investment have already done so. That means there is the extra complication of finding companies that are not already fully valued.
Though the investment is bursting with obviousness internationally, you have nothing on the South African market that really bounces out at you. The obvious candidate would be Naspers/Prosus, and the company is positioned for growth for other reasons. Its service businesses will certainly be secondary beneficiaries of AI, but it’s not on the frontline of large language models.
Still, Naspers/Prosus is definitely worthy of consideration – or at least that was the case until Monday, when Washington added a number of Chinese tech giants, including Tencent, Naspers’s biggest asset by miles, to a list of firms that work with the Chinese military. The designation does not involve immediate bans, but it will certainly turn off international investors, as evidenced by the immediate 8% share price drop. Tencent itself says the designation is incorrect.
But for those not already up to their ears in the stock, this might constitute a rare cheap entry point. The company has new management, and its investment strategy is definitely on a new path, as the purchase of Latin America’s leading online travel agency, Despegar, for $1.7bn demonstrates. There is always the hope that the Tencent discount closes at some point.
What about other potential beneficiaries of AI on the South African exchange? One of the likely trends in AI in 2025 will be a process called “moving up the stack”. Building a large language model is staggeringly expensive; OpenAI raised $6.5bn recently and that is just the start.
But the real money spinners will be much more focused tools “higher up the stack” that perform a particular task very well, like responding to customers’ wishes and complaints. In some ways, the most likely frontline winners will be software companies, insurance companies and banks, for whom customer interaction is key.
In South Africa, many of these companies are operating below the radar, but the one listed company to watch is one of the market’s least favourite, EOH. The omens are not immediately apparent but if any company could take advantage of new AI-focused banking products and sell them into the market it would be a software services company like EOH. After years of turmoil, the company had an excellent 2024, and is 70% up, but still way off its high point. Worth a look.
The Trump factor
What about the renowned Trump trade? For South Africans the Trump trade is elusive, particularly because its parameters are so variable and its essential character is so negative.
If you were forced to think about a South African version of taking advantage of Trump’s ascension then perhaps the best option would be to look at exporters, because as the dollar’s rise has demonstrated already this year – it’s up 4.2% against the rand over the past month alone – investors clearly believe that higher tariffs will create inflationary pressures, which will keep US yields elevated, which will reinforce dollar strength.
An odd beneficiary here might be Sun International, which is cheap and already coming off a respectable year, as a stronger dollar could boost tourism, and there is the kicker of tourism numbers not quite back to normal. South Africa will also host the G20 summit at the end of the year, which could boost the company’s ailing Joburg hotels.
What about other exporters? The obvious candidates here are miners, though lots of the upside is priced in. With ESG pressures declining, particularly during the Trump presidency, could you hold your nose and invest in coal miner Thungela? The company didn’t have a great 2024, but with a p:e of six and a dividend yield of 9%, it’s hard to resist.
The future of the mining companies is somewhat dependent on our third variable: China. China’s prospects are very hard to read, even more so than most years, partly because we don’t know whether the government’s stimulus measures will work, or even their size.
Still, late last month, the World Bank slightly increased its growth forecasts for 2025 to 4.5%, and the Chinese authorities have set a growth target of 5%. Even though that’s not an increase on 2024, for South Africa’s mining industry, that’s good news, particularly with the dollar rise. And of course, there is the tantalising prospect of some M&A in the industry this year, and with any luck some policy improvements (though that might just be too much to hope for).
Oddly, this third trend conflicts with the second trend: China still has to demonstrate how it will deal with the Trump presidency, and honestly the omens don’t look great. Perhaps the best we can hope for is a continuing impasse.
Finding value
One larger trend that is worth raising is the question of value investing, particularly because it has been increasing the appetite for South African companies. A host of local companies are under offer at the moment, or may be soon. MultiChoice and Barloworld are just two of the larger examples.
The JSE continues to be cheap by international standards. The all-share’s p:e is currently just above 12, which is half that of the S&P 500. Still, it’s worth noting that by the standards of other stock markets around the world, it’s not actually that low. The FTSE is sitting at 15, and the German, French and Japanese exchanges are not much higher.
Apart from the US exchanges, the other expensive exchanges are Australia and India, and investors in neither country are typical bargain hunters that might seek out JSE stocks. The point is that though the JSE is cheap, the investment arguments that might catch the eyes of international buyers are still a bit lacking – particularly when their own exchanges are not that expensive.
Changing that level of confidence will be the frontline task of South Africa’s politicians and administrators for 2025 and, honestly, their track record is mixed, even though interest rates are likely to come down and growth is likely to rise incrementally this year.
What that means for the stock market is that value investing on its own can’t really be taken as a sure-fire winner. Yet there are some very cheap stocks on the JSE which honestly deserve some support. For example, Exxaro and a host of property companies, including Resilient Reit and Redefine, are on ratios below five, which in most circumstances would be “screaming buy” territory.
The curveball in South African investing is the state of the government of national unity. Any suggestion that it might fall apart will most probably thump local stocks hard. But so far, so good. You can only hope the country’s politicians will do the right thing – and that is rarely a sure-fire bet.
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