International fund managers are showing unprecedented interest in investing in local companies, largely on account of their extremely cheap valuations, but remain hesitant due to lack of structural reform.
The local investment banking arm of America’s second-largest bank by assets traditionally hosts an annual investment conference at Sun City that is attended by local and foreign fund managers and the management teams of SA listed companies.
“Four years ago the mood was very glum and corporates were giving a very gloomy message, but this year the tone surprised investors on the upside,” said Bank of America investment strategist John Morris, speaking at a press briefing on Tuesday to discuss outcomes from the conference.
Morris said the conference participation by fund managers was this year double the previous record with a broad geographical split between investors: 39% were from North and South America, 49% were from the UK and Europe, and 12% from Asia.
The bank expects, on average, a 50% increase in earnings this year from local companies that it estimates are trading on average nearly 40% cheaper than their emerging market peers.
Despite this, the actual allocation by foreign investors to the local market remains smaller than previously, as investors wait to see the implementation of much needed changes to make the economy more competitive and elevate economic growth.
“We [SA Inc] will be fine as long as commodities prices remain elevated. This will keep the rand in check. But we can’t say we are undertaking structural reform. If we did reform, foreigners would be investing in SA like there is no tomorrow,” Morris said.
The bank also facilitates bilateral meetings between foreign investors and the management teams of domestic companies to generate interest in the local market.
Meeting requests are generally considered a positive sign for the individual company as it means fund managers are seriously considering its investment proposition and are eager to understand more about the company and its business model.
The top requests for meetings with executive teams were for companies that have prospects to grow earnings faster than their peers.
Morris said the top companies requested by foreign investors for meetings included Clicks, Shoprite, Mr Price, Naspers/Prosus and Discovery. “The foreign investors like growth stocks and are generally prepared to pay up for them.”
Another feature of the conference was the interest shown in resource companies and in particular the platinum group metal producers (PGMs) on account of strong demand from China and the prospect of little new supply coming on stream in the short-term.
“If you take 2020, for example, there was not one resource name in the top 20 requested for meetings with fund managers. The year before [2019] was Mondi, but generally it is usually consumer names and financials that make these lists. But this year we did have Impala Platinum and Sibanye being requested and there was a lot of interest in PGMs.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.