SA fund managers are beginning to rethink their investments in cash and offshore equities, which are traditionally seen as hedges against domestic economic and political risks, and are instead looking to beef up their portfolios with domestic stocks they believe will benefit from rising commodity prices.
A Bank of America (BofA) survey shows a near record 71% of SA fund managers expect the local stock market to trade at higher levels six months from now, while 57% have overweight equity positions, the highest percentage since 2011.
The BofA survey, which polled 14 SA fund managers between April 6 and April 11, also showed that local portfolio managers believe platinum group metals (PGMs) are “moving into a supercycle”.
“Cash and offshore positioning by managers are low relative to history,” said John Morris, an investment strategist at BofA. “While there could be a pullback in the local equity market, the fund managers surveyed indicate they’d look to add domestic stocks on any pullback.”
The JSE all share index has delivered more than 13% in dollar terms so far this year as rising commodity prices benefited heavyweight resource counters such as Anglo American and BHP. A strong recovery in the rand, which is the best-performing emerging-market currency so far this year, has also enhanced the local bourse’s dollar-denominated returns.
Coronation Fund Managers, which oversees about R600bn in assets, said in February it had moved to an overweight position on SA equities across its domestic portfolios after being underweight on local stocks for most of the past decade. The Cape Town-based asset manager said at the time it was particularly bullish on SA mining stocks and had switched to a neutral position on global equities as they were likely to deliver mediocre returns after an extraordinary 10-year run.
Morris said SA fund manager positioning is “lowest in real estate and gold” while banks, metals, including platinum, and mining stocks are most preferred by those with a more than 12-month investment horizon. SA fund managers also believe platinum, palladium and rhodium are likely to enjoy a super cycle as demand for the metals from vehicle makers, which use them to make catalytic converters, continues to outstrip supply.
“There’s a fundamental deficit in the PGM market because there is inelastic demand from automakers while the miners are unable to meet that demand due to lack of investment in new mining projects over the last decade,” said Morris.
SA is the world’s biggest producer of PGMs but it has suffered years of underinvestment in the past decade due to a combination of labour unrest, increasing costs, lack of policy certainty and steadily rising concerns that a shift to electric vehicles will reduce demand for the metals. Morris said it may take until 2030 before a meaningful shift to electric vehicles begins to reduce demand for PGMs from automakers.
BofA’s survey shows that 93% of SA fund managers expect the domestic economy to improve, while there is “strong consensus” that the Reserve Bank will raise its repo rate from a five-decade low of 3.5% during in the first quarter of 2022.
SA fund managers see “policy shifts to the Left” as the biggest risk to their outlook, with “weak earnings” as their second-biggest concern. BofA says investors are also “keeping an eye” on a possible third wave of Covid-19 infections, with 50% of them having little confidence in SA’s ability to roll out vaccines in 2021.
Half of the fund managers surveyed see no “operational solution” for Eskom and its inability to boost its power generating capacity.
A net 64% of SA fund managers say domestic bonds are undervalued. Even so, the majority say they would sell SA’s benchmark R2030 bond at 8.29% to lock in price gains. The yield on the bond was 9.04% at 2.31pm local time, meaning a decline to 8.29% would result in considerable gains given that bond yields move inversely to their prices.
BofA’s survey shows that SA fund managers expect the rand to trade at R14.82/$ in 12 months’ time. “The stronger the rand goes, the more they will rethink their offshore equity positioning,” said Morris.
Correction: This story previous cited Morris saying it would take 20 years for carmakers to reduce PGM demand, when it should have said by 2030. We regret the error.
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