This year, South African investors have had plenty to smile about. Local markets have charged ahead, with the JSE All Share Index up an impressive 36% year to date, setting the pace among major asset classes. Leading the charge is the Basic Materials sector, which has powered ahead with gains of roughly 110%, fuelled by buoyant commodity prices and renewed investor appetite.
Pictured: Nicholas De Clercq - Quantitative Analyst* at Prescient Investment Management
But as markets touch new highs, investors might be thinking it’s time to take a breath. After all, the smartest moves are often made when others are caught between fear and greed. And right now, that’s the tension playing out in the local equity space, as the market grows ever more concentrated in Basic Materials, investors are starting to wonder whether these elevated price tags still make sense.
Figure 1: Sector Contribution to JSE All Share Index Year to Date
The impact of the Basic Materials sector has been striking. Much of the market’s strength this year can be traced back to soaring resource counters, with meaningful support also coming from the Technology sector, led by heavyweights Naspers and Prosus, which have gained roughly 45% and 58%, respectively. Stripping out these two dominant sectors, the JSE All Share Index would have delivered only about 7% for the year, a reminder of how concentrated market performance has become.
What’s behind the resource rally? In short, a changing global mood. Geopolitical tensions have escalated, but unlike in the past, when uncertainty sent investors rushing into the US dollar, this time, the trade has shifted. With questions swirling around the strength of the US economy, investors and central banks alike have looked elsewhere for safety. The result? A renewed rush into precious metals: gold up 56%, platinum even higher and together, they’ve reignited the Basic Materials engine driving the JSE.
Figure 2: Gold vs Platinum Year to Date
These price increases have, unsurprisingly, fuelled the rally in South Africa’s Basic Materials sector. As a result, the sector now accounts for roughly 30% of the index, up from 19% at the start of the year, a remarkable shift in market composition. This growing dominance has helped propel the index to repeated all-time highs in 2025, with performance remaining impressively consistent throughout the year. Naturally, such strength has come with higher valuations. The price-to-sales ratio of the index has risen by around 27 % year to date, while the price-to-earnings (P/E) ratio tells a similar story. Much of the increase in the overall P/E can be traced back to Basic Materials (JBINDTR), where the sector’s trailing 12-month valuation multiple has climbed from 13.3 to around 19.8 over the same period.
To better understand how each sector has contributed to this shift in valuations, the following chart breaks down the relative impact of sector P/E ratios on the overall All Share index.
Figure 3: Sector P/E Ratios
The question is then, what these developments mean for the outlook of South African equities as a whole. As a rule of thumb, higher valuations often leave more room for downside return surprises, but valuation alone rarely tells the full story. Elevated multiples can be justified when earnings growth potential remains strong and that balance between value and growth is at the heart of today’s market debate, particularly in the offshore equity market.
When forming an outlook, valuations must be considered alongside broader economic, financial conditions, and sentiment. Together, these elements shape the risk–reward profile for local equities. Without having to take a view on commodity prices themselves, it’s clear that shifts in these underlying factors, valuations included, have tempered our overall enthusiasm. As a result, we’ve adopted a more moderate stance toward South African equities in the near term.
Disclaimer:
Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612). No action should be taken on the basis of this information without first seeking independent professional advice.
Please note that there are risks involved in buying or selling a financial product, and past performance of a financial product is not necessarily a guide to future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. There is no guarantee in respect of capital or returns in a portfolio. Graphs are included for illustrative purposes only. *Representative acting under supervision.
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