Morningstar Inc. is steering clear of South African stocks in its global portfolios as relatively weak economic growth overshadows cheap valuations. That contrasts with the $375 billion asset manager's overweight stance on emerging-markets, with Brazil and Mexico its top picks outside of Asia, said Sean Neethling, the firm's South African investment head.

The FTSE/JSE All Share Index has declined more than 4% in dollar terms this year and is poised for its first annual drop since 2022. That compares with a 21% rally for the MSCI emerging-markets equity gauge, which has been propelled mostly by gains for Asian artificial intelligence-related firms.

"If you look at South Africa at a company-specific level, there's not many companies that are at the forefront of what's driving markets right now in artificial intelligence and tech," Neethling said. "South Africa doesn't have that growth factor that a lot of other emerging markets have right now."

Morningstar is overweight on the nation's bonds, which have attractive yields relative to emerging-market peers and developed-market debt. For rand-based investors, South Africa offers really attractive and compelling value, particularly in the bond market, where absolute yields and yields to maturity are among the most attractive in emerging markets, only second to Brazil.