Most SA asset managers expect the rand to strengthen to R17.30/$ in 2024 and for the Reserve Bank to start cutting the repo rate in the second quarter of the year, which will boost consumer-facing stocks and the domestic equity market broadly.
Results from SA Fund Managers Survey, conducted by Bank of America Global Research, show that more than 70% of asset allocators believe that SA equities are undervalued, with more than before looking to buy instead of selling SA Inc before next year. The survey was conducted from November 3 to 9.
John Morris, SA investment strategist at Bank of America Global Research, said things are looking up for SA’s equities market and that emerging markets are likely to do better than developed markets next year.
“The positive outlook for SA stocks is because asset managers have a firmer rand view, which means they have a weaker dollar view. And with the SA Reserve Bank expected to start cutting interest rates in the second quarter of the year, this will lead to better returns from the SA market of about 17%,” said Morris.
“You are less likely to get that return from the S&P 500, particularly if the rand is firming. If you were selling domestic stocks now at a R100, and you put that in an S&P500, you will be losing on currency and a lower return on the equity market. The pendulum has shifted more in favour of domestic assets for next year on a weaker dollar because then you will have higher commodity prices.”
The results of the survey also show that the local fund managers still have a liking for government bonds, and most have an overweight position on them.
“The asset managers also love bonds. There is a shift in the view that next year will see domestic assets deliver better returns than offshore. But that will be tactical preference because, long-term, asset managers are likely to increase their weights overseas,” said Morris.
The study shows assets allocators are likely to buy chemicals, healthcare, metals and mining, retailers and food producers and banking stocks.
Torrid year
Investors have a dim view on platinum, telecom, real estate and life insurance stocks. One of the country’s biggest asset managers, Coronation, has disinvested from the platinum sector, saying its outlook is dim due to the rise in demand for green metals in response to just energy transition.
Food producers and most retailers have had a torrid year on the JSE as high interest rates and inflation ate into consumers’ disposable incomes, and partly due to poor strategies.
While upbeat about SA assets before 2024, the asset managers also flagged Eskom and Transnet’s underperformance as a “major problem” weighing on sentiment and warned the reform prospects are quickly fading.
Other impediments to growth flagged by fund managers include SA’s poor skills outcomes, wage rigidity, service delivery failures and water issues.
Foreign investors have been consistent net sellers of domestic shares in the past seven years, according to available JSE data, but the selling momentum has gathered pace in recent months in line with weakening growth prospects.
Tina Fong, strategist at Schroders, said because corporate earnings are one of the key drivers of equity returns, it is unsurprising that investors are keenly watching the health of domestic economies and their potential impact on market earnings and return prospects.
“When an economy is performing well, consumers often spend more, and business activity increases. As a result, corporate profit margins improve, leading to higher earnings growth,” said Fong.
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