It’s been a rough year for South African stocks, but signals are emerging that they’re set for a rebound in 2019.

Cheap valuations, flows into U.S. exchange-traded funds and optimism among global analysts are some of the factors that suggest South Africa’s $445 billion equities market may recover from its worst year in the past decade.

Year to Forget

A rally can’t come soon enough for investors. The main index in Johannesburg is down 16 percent this year, the most on an annual basis since 2008. The return looks even uglier in dollar terms, with the gauge having lost 26 percent, the fifth-worst performance globally, according to data compiled by Bloomberg. Foreigners have sold a net $3.3 billion on the stock exchange since January.

The euphoria after Cyril Ramaphosa become president in February -- ending Jacob Zuma’s crisis-ridden tenure -- proved short-lived, with South African assets and the rand battered as a strengthening dollar and worsening trade relations between the U.S. and China buffeted emerging markets. Sentiment soured further when the economy fell into recession and investors fretted about the debt mountain of 419 billion rand ($30 billion) at state power company Eskom Holdings SOC Ltd.

More Attractive

But thanks to this year’s slump, Johannesburg-traded stocks are now much less expensive. Relative to developing nations overall, they haven’t been this cheap in almost seven years. The forward price-to-earnings ratio for the FTSE/JSE Africa All Shares Index has dropped to 11.4 times from 15.5 at the start of the year. That’s reduced its premium over MSCI’s gauge of emerging-market equities to the lowest level since early 2012.

ETF Inflows

Flows in the ETF market hint that global investors are becoming more bullish. The $461 million-iShares MSCI South Africa ETF, the biggest such fund in the U.S. dedicated to tracking the nation’s equities, had net inflows of $79 million in November, the most for any month since March 2016. That suggests traders are anticipating that when emerging markets rebound, South African stocks will outperform.

Lending credence to this view is the improvement in the economy, which emerged from recession in the third quarter and grew faster than analysts had expected.

Grand Expectations

Analysts forecast South African earnings to rise strongly next year

Global Optimism

The upshot is that global analysts are optimistic on how South African companies will perform in 2019. They’re predicting a 21 percent increase in local-currency earnings, compared with this year, the highest among major emerging markets after India, according to UBS Group AG.

Bank of America Merrill Lynch is among those recommending that clients go long South African equities, saying the rand will benefit if, as it expects, global trade tensions ease.

“The stage is set for a relief rally in SA equities,” Mary Curtis, RMB Morgan Stanley’s chief stocks analyst in Johannesburg, said in a note on Dec. 3. “Year-to-date outflows have been significant, technicals are supportive, valuations are cheap and the policy measures in China plus recent détente between China and the U.S. on trade indirectly support South Africa via the resource sector and China-exposed stocks.”

Still, there are plenty of risks. Political tensions are rising before South African’s general elections in May. Should Ramaphosa fail to win a significant majority, he may be forced to delay economic reforms including revamping state companies by retrenching workers. Investors are also on edge about the ruling African National Congress’s attempts to change the constitution and make land expropriation easier.

And then there are external factors. Among the world’s most liquid currencies, the rand is at the mercy of global events and would likely suffer from any renewed rout in emerging markets.

Risk reversals, which are derivatives measuring the premium of contracts to sell a currency over those to buy it, suggest the rand is the world’s most vulnerable currency over the next three months after the Turkish lira and Russian ruble.