A record number of SA fund managers say bonds are undervalued based on the latest sector survey by Bank of America (BofA) securities.
No less than 94% of the 18 SA-based fund managers surveyed between June 2 and 8 said they felt SA fixed-income securities were undervalued, the highest proportion in 10 years of asking this question in the survey, with a further 72% saying the same about local equities. BofA said this was supportive of higher bond and equity returns over the next 12 months or more.
“Managers are good at asset allocation views. If they say the bond and equity markets are undervalued, that is important. After these responses in the past, bonds and equity are on average higher in 12 months,” said John Stuart Morris, a senior director for investment strategy in BofA’s Johannesburg office.
While SA fund managers still think a recession in 2023 is likely, their outlook is less bearish, particularly on the rand, which they expect to rebound to about R17.53/$ over the next 12 months.
More than two-thirds (69%) of fund managers surveyed say they expect the Reserve Bank to hike rates again in the third quarter, though 61% say monetary policy is “too restrictive”.
Despite their slightly more optimistic outlook, local fund managers nevertheless concede that SA has “major problems” and that hoped-for macroeconomic reforms are likely to continue at the same slow pace.
Eskom and Transnet are still considered the biggest risks to domestic equities, though the proportion of fund managers who flagged this as their leading worry was only 30%, the lowest reading in 2023 and down from a high of 65% recorded in March 2023.
Other economic and business constraints listed by local fund managers were poor skills outcomes, wage rigidity, government intervention and service delivery failures by state-owned entities and municipalities. That led them to estimate that SA corporates were likely to add between 5GW and 6GW of additional power capacity to the grid by 2025.
Yet despite these well-known concerns all the fund managers surveyed indicated they want to decrease cash in favour of domestic equities and offshore assets.
Local fund managers are also maintaining their current equity positions and then buying more domestic stocks during market pullbacks.
While uncertainty in the future is high, none of the fund managers indicated that they intend to sell their equity holdings. A net 61% of fund managers surveyed indicated they want to take overweight positions in domestic equities over the next 12 months or more, the highest reading in 2023.
Fears of a possible grid collapse also eased in June with the consensus among fund managers being that it would take about two weeks to restart should that catastrophe occur. Healthcare, banks and tobacco sectors were seen as the most favoured while gold, real estate and beverages were least favoured.
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