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SA: policy progress supports market confidence

South Africa has taken an important step towards strengthening the economy by lowering its official inflation target from 4.5% to 3%. According to the Medium-Term Budget Policy Statement presented last month, this will be phased in over two years. The shift is expected to gradually support lower interest rates, especially as inflation expectations adjust. It also brings South Africa more in line with other emerging markets and major trading partners, supporting a more stable long-term economic environment.

At the same time, global ratings agency S&P has upgraded South Africa’s credit rating, citing progress on public finances and ongoing economic reforms. The country is showing a clearer commitment to managing debt and improving growth prospects. While the rating remains two notches below investment grade, the upgrade signals reduced risk – and further improvements could lead to another upgrade if reform momentum continues.

These two developments – lower inflation targets and an improved credit rating – are encouraging for the bond market. The budget update shows that government is now borrowing slightly less than previously expected, and markets have already started to price in the benefits of lower inflation and improved fiscal management.

Together, these steps help reduce risk, bolster confidence in South Africa’s finances, and create a more favourable backdrop for government bonds over the medium term. Lower real interest rates should also have a positive impact on the valuation of South African equities.

Concentration risk: opportunity for active investors

While much attention has been paid to the ‘Magnificent Seven’ in the US, concentration risk is a global issue. In Japan and the UK, the top 10 stocks make up nearly half the major indices, while in markets like South Korea and Taiwan, names like Samsung and TSMC dominate with outsized index weights.

This trend has intensified over the past two years, particularly in Europe. In France, for example, companies like LVMH, L’Oréal and several major banks now account for a significant share of the local index.

Concentration risks in equity markets are not a new phenomenon, but the risks increase if these dominant stocks become too expensive. The US market is currently trading at a price-earnings ratio for this year of 23 times with low free cash flow yields – heightening the importance of selectivity.

In our global high-quality strategy, our top 10 holdings represent 43% of the portfolio but just 5.5% of global index weight – highlighting the high-conviction nature of our positioning. Since mid-2024, we’ve increased activity, rotating into attractively valued names such as Hilton, Applied Materials, CME, ADP, AON and Copart, while trimming more fully valued holdings like Intuit, Alphabet, SAP and others.

While we continue to hold quality mega caps like Microsoft, Alphabet and Visa, our focus remains on valuation discipline across the market-cap spectrum. This is what has driven the strategy’s solid long-term performance – 8.9% annualised in US dollars (13.3% in rands) since inception in February 2014.

Retail sector: easing inflation, but demand still weak

The latest South African retail reporting season across October and November confirms that consumer demand remains weak, with retailers delivering subdued top-line growth despite easing inflation, interest rate cuts and lower fuel prices.

Food retail showed relative resilience but continued to reflect a softer demand environment. Shoprite reported slower sales off a high base, with internal inflation falling below 2% and some banners moving into outright deflation.

Boxer remained the standout: even in a deflationary environment, it delivered strong volumes and continued to execute well on space roll-out – the core driver of its investment case. Woolworths Food saw modest gains, supported by higher-end consumers, though growth remained steady rather than strong.

Discretionary retailers were broadly muted, with mid-single-digit sales growth and a highly promotional environment as elevated inventory levels met weak underlying demand. Pepkor outperformed on revenue, though the lift was credit-driven rather than indicative of a stronger consumer. The festive season also faces a tougher year-on-year comparison, given last year’s one-off support from the two-pot retirement system withdrawal.

Across the board, the message is consistent: household consumption remains subdued, largely because growth in gross domestic product hasn’t gained meaningful traction. Without stronger income and employment momentum, easing inflation and rate relief alone aren’t enough to drive a consumer recovery.

Vodacom outpaces its growth targets

Vodacom turned in one of its strongest interim performances – a clear step-up versus prior periods and comfortably ahead of its medium-term earnings before interest, taxes, depreciation and amortisation (EBITDA) ambition. EBITDA grew 14.7%, supported by double-digit revenue momentum and a 15.8% lift in the dividend, in line with the 75% payout policy. Margins expanded to 37.3% from 36.1%, reflecting disciplined cost control and scale benefits in the faster-growing markets.

Rest of Africa remains the clear growth driver. Egypt stood out again, with local-currency service revenue up 42% on rapid Vodafone Cash adoption. International markets across DRC, Tanzania and Lesotho posted a clean 13% constant-currency rebound, driven by M-Pesa depth and rising data usage. Beyond Mobile – fintech, IoT and fixed – now contributes 21.8% of service revenue, keeping Vodacom firmly on track for its >30% Vision 2030 mix target.

South Africa remains the cash anchor, though top-line growth was subdued at 2.2%. Still, better LTE traction, network stability and a flagged R1.5 billion cost-saving opportunity provide a credible margin buffer. Strong cash generation saw free cash flow swing to R2.7 billion, leverage fall to 0.9 times and return on capital employed lift meaningfully.

Overall, this is a high-quality print: broad-based growth, widening margins and a clean dividend uplift – with Egypt still the dominant swing factor. This positions Vodacom well for long-term earnings growth and sustained income appeal.