A guide to investing in South African stock markets

In 2013 Jim O'Neill, the Goldman Sachs economist best known for coining the term 'BRIC',  noted that 'one popular idea has been to suggest that BRICs should in fact be BRICS, with the capital S for South Africa. Some commentators believe South Africa is a natural member of the BRICs, given its status as Africa's largest, and one of its wealthiest, economies.' The country accounts for 24% of Africa's GDP and is ranked as an upper-middle-income economy by the World Bank. Stockopedia will soon be providing readers with the requisite data for investing in South African stocks. We’ve put this guide together to help you get started.

Why invest in South Africa?

Mining Giant

South Africa has abundant natural endowments, particularly mineral resources. International investors first became interested in the country during the nineteenth century, following the discovery of diamonds in the Cape Province in 1866 and the discovery of gold twenty years later in the Witwatersrand. The subsequent influx of foreign labour and capital transformed South Africa into a regional economic powerhouse. JP Morgan, the American investment bank took a particular interest in the region during the early twentieth century when the firm raised capital to invest in mining operations on the East Rand, and co-founded the multinational mining company, Anglo American plc, in Johannesburg. Anglo American is currently listed on the JSE and remains the world's largest producer of platinum, with around 40% of global output.

Another mining giant based in South Africa is AngloGold Ashanti. The company owns the Ashanti mine in Ghana - one of world's major gold deposits. In 2014 the firm was the world's third-largest producer of gold. Today South Africa is a huge producer of iron ore and it became the third biggest iron ore supplier to China in 2013. The country is also the 6th largest gold producer in the world, not to mention the 7th biggest coal producing country.

Exposure to Emerging Markets

Economic growth in the West has stumbled and slowed since the crash of 2008, while African economies have driven forward. According to the World Bank, Sub-Saharan Africa has grown at around 5% per annum since 2009. Many economists are bullish about Africa’s economic growth over the coming decades. Jim O'Neill has labelled Nigeria as one of the N-11 (or 'Next Eleven') economies which have a high potential of becoming among the world's largest economies during the 21st Century. South African companies are well placed to take advantage of this growth, partly because major African companies are listed on the Johannesburg Stock Exchange. For example, Oando plc is a Nigeria based oil and gas company and is one of Africa’s largest integrated energy providers. In addition, many companies that are listed and headquartered in South Africa generate a substantial portion of their revenues in the rest of Africa. AngloGold Ashanti and Gold Fields generate more than 30% of their revenues in the rest of Africa.

It would be reasonable to assume that more people will use internet and telecommunication services as Africa becomes increasingly developed. This would be good news for companies like the South African mobile company, Mobile Telephone Networks (MTN). This firm generates 26% of its revenues in South Africa compared to 55% in the rest of Africa and 36% in Nigeria. Another South African firm that could benefit from the emergence of a middle classes in Africa is the Distell Group. This brewer produces the majority of its beverage in South Africa, and has networks across Angola, Ghana, Kenya, Mauritius, Namibia, Tanzania and Zimbabwe.

What are the major South African exchanges?

The main stock exchange in South Africa is the Johannesburg Stock Exchange (JSE), the largest stock exchange in Africa with around 400 listed companies and an overall market capitalisation of R6.7tn (£321bn). The JSE operates 2 markets: the Main Board and the AltX. The Main Board is for well-established companies, while the AltX is an alternative stock exchange for small and medium sized companies. It is generally harder to register on the Main Board, as a company must be expected to list with a market capitalisation of at least R25m (£1.2m) compared to just R2m on the AltX. In addition, a company listing on the Main Board must have generated R8m in pre-tax profits during the year before the IPO. No track record of profitability is required to list on the AltX.

What are the major South African Indices?

There are two main stock indexes in South Africa. The FTSE/JSE Africa All Share Index represents virtually all stocks listed on the main board of the JSE. In addition, the FTSE/JSE Top 40 Index consists of the 40 largest South African companies ranked by market value. As readers can see from the table below, both of these indices are weighted heavily towards the personal goods, natural resources and food & beverages sectors.

The FTSE/JSE Equally Weighted Top 40 Index is an unweighted index (ie. each company takes up an equal weighting). It therefore provides an alternative to indices constructed according to market capitalisation weightings. Investors that are particularly interested in mining stocks may want to search for investment opportunities within the FTSE/JSE Gold Mining Index (ie. South Africa’s index of gold-mining stocks) or the FTSE/JSE Resources 20 Index (South Africa’s index of resources stocks).

Which UK brokers provide access to South African markets?

Some of the UK based brokers that provide access to South African markets include:

• AJ Bell Youinvest;
• Redmayne Bentley;
• Daniel Stewart;
• Saxo Bank;
• Killik & Co.

In terms of trading commissions, the cheapest of these brokers are by far Saxo Bank and AJ Bell Youinvest who charge a minimum commission of £9.95 and £4.80 (R100) per trade respectively. The other three brokers, namely Redmayne Bentley, Daniel Stewart and Killik & Co charge at least £30, as readers can see from the chart below. AJ Bell, Saxo Bank and Killik charge respective forex fees of 1%, 0.5% and 0.5%.

Do UK investors pay tax on South African shares?

In general, non-residents are not subject to CGT on the sale of shares. There is an exception to this rule however, for property-owning companies. A non-resident may have to pay CGT if they own 20% or more of the shares in that company; and more than 80% of the market value of those shares is attributable to immovable property in South Africa. Dividends paid to non-resident shareholders are typically subject to a 15% withholding tax. These details are further outlined on the South African government website - here - and on the HMRC website - here.

Conclusions

Africa has among the world’s fastest-growing continents. Many forecasts believe that this trend may continue and South Africa may be the most obvious route for investors to rise the African growth story. We will soon be providing StockReports and StockRanks for South African stocks. We hope that these will help readers identify further investment opportunities in Africa. We will also be exploring which South African stocks qualify for the GuruScreens. If any investors have any experience in the South African markets do please feel free to leave your own opinions below.