The South African equity market has delivered its strongest relative rally in modern history.

From its April 2025 low to now, the JSE all share has outperformed the MSCI world index by 45 percentage points, rallying 76% in dollar terms. Nothing in the past two decades comes close to this performance gap.

The scale of this move demands explanation. South Africa typically outperforms on the downside but underperforms in recoveries. The downside played out as expected in early 2025, when Trump tariff fears sent the JSE down 15%, compared with 11% for global markets.

But the subsequent rally has been extraordinary. South Africa’s previous best relative performance was the Covid recovery, when it tracked 21 percentage points ahead of the MSCI. In typical bull markets over the past two decades, South Africa has underperformed by an average of 8.5%.

Part of the story is a broad emerging markets rally. For the first time in nearly a decade, emerging markets outperformed developed markets in 2025. This reflects several factors: declining US interest rates making higher-yielding markets more attractive, growth concerns in the US despite AI optimism, and a 10% dollar decline that has driven broad flows to emerging markets. The rand’s 10% appreciation has amplified returns for international investors.

However, South Africa has outperformed even the broader emerging markets index by about 15 percentage points. Other emerging markets face headwinds from Russia/Ukraine exposure or China concerns, though South Africa has had to navigate its own US diplomatic pressure. But the outperformance clearly involves a domestic story beyond just riding the emerging markets wave.

It is partly a commodities price story. The JSE’s resource index rallied 88% over the period, driven by strong precious metals prices, particularly gold and platinum. This accounts for much of the outperformance and deserves scrutiny. Commodity rallies are cyclical, and an 88% move in nine months raises sustainability questions. Resource stocks now trade at elevated multiples relative to historical norms, and any commodity price normalisation would have a big effect on the index.

The JSE’s resource index rallied 88% over the period, driven by strong precious metals prices, particularly gold and platinum. But resources aren’t the only story.

But resources aren’t the only story. The financials index is up 34% over the same period, and even the long-neglected industrials have gained 15%. This broadening is critical, suggesting the rally isn’t purely a commodity play but reflects genuine improvement in domestic conditions. Three domestic factors underpin the broader market performance.

Interest rates are trending down and will stay lower for longer. The Reserve Bank’s new 3% inflation target is gradually embedding itself in long-term rate expectations. This matters for equity valuations because the risk-free rate is the starting point for any valuation. As rates fall, investors become less demanding of equity returns and can pay higher prices for the same cash flow outlook.

More significantly, the equity risk premium appears to be compressing. It is the additional return investors demand for bearing equity risk above the risk-free rate.

Risks are diminishing

South African equities have carried a substantial risk premium for years, reflecting concerns about electricity supply, logistics failures and fiscal sustainability. These risks are diminishing. Electricity supply has stabilised dramatically, with load-shedding largely eliminated.

Logistics performance on rail and ports has improved, albeit from a low base. The fiscal position has strengthened, with South Africa achieving a primary surplus with a good outlook for debt ratios to start improving.

These are fundamental shifts in the risk environment facing South African companies. Firms are no longer as vulnerable to infrastructure failures, and the economy is far less vulnerable to a government debt crisis. Investors are repricing this reality.

The rerating may lastly simply be correcting years of undervaluation. South African equities underperformed international markets consistently from the global financial crisis to 2024. This became acute after the 2015 Nenegate episode destroyed confidence in fiscal discipline under the Zuma administration. The trailing price-to-earnings ratio of the Alsi 40 fell to 10.5 in mid-2023, well below the long-term average of 15.5.

The trailing P/E is now at 16.7. After a 76% rally, being only marginally above the long-term average is remarkable. It suggests either that the market was extraordinarily cheap nine months ago, or that earnings have grown substantially, or both.

Compared with other commodity-heavy markets such as Australia (PE of 18) or emerging markets broadly (PE of 14), South Africa now trades about in line rather than at a persistent discount. This normalisation may have further to run if domestic reforms continue.

The rally reflects rerating — investors paying more for existing cash flows. The question is whether fundamentals will now improve to justify current valuations. Several factors suggest they will. The cost of equity capital has fallen faster than debt costs, thanks to the declining equity risk premium. This should encourage equity issuance and new listings as companies take advantage of cheaper capital. There are early signs: JSE primary market activity rose in the second half of 2025 after years of drought.

Consumer demand should strengthen. Those with equity exposure, including the growing cohort with defined contribution pensions, are wealthier. While they can’t access the cash immediately, they should feel less risk-averse about consumption. More directly, mining sector profits from high commodity prices will filter through to suppliers, employees and local economies, creating a modest wealth effect.

Corporate profitability

Structural reforms should lower the cost of doing business across the economy. More reliable power reduces backup generation costs. Improved logistics reduce inventory requirements and delivery times. Lower data costs boost productivity. Higher tourist numbers support hospitality and services. These effects are incremental rather than transformative, but they should lift corporate profitability materially over the next 12-24 months.

None of this is guaranteed. Commodity prices could normalise quickly, removing some of the gains from the resource sector that drove much of the rally. Global geopolitics remains volatile. Donald Trump’s second term continues to deliver surprises. Domestically, local government elections in late 2026 could disrupt the reform momentum if outcomes weaken the government of national unity.

The valuation buffer is also thinner than it appears. At a PE of 16.7, there’s limited room for disappointment. If earnings don’t grow to match the rerating, or if any of the reform momentum stalls, the market could give back gains quickly.

But the base case has shifted. For the first time in more than a decade, the domestic risk outlook has improved rather than deteriorated. That creates space for cautious optimism that this rally reflects something more durable than just a commodity spike.

• Dr Stuart Theobald is founder and chair of research-led consultancy Krutham. This article first appeared in Business Day.