SA bonds and equities are set to outperform offshore assets in 2024, with retail stocks, particularly food producers, back in favour with a majority of asset managers expecting the sector to deliver high returns, results from the SA Fund Manager Survey shows.
The shift in sentiment to SA assets came after a year in which the country’s equities market recorded net equity outflows of R100bn after foreign investors sold shares in SA Inc.
The survey, conducted by the Bank of America, shows that sentiment has turned positive towards SA assets in 2024, with money managers expecting returns of double digits from the domestic stock market.
Seventy-nine percent of fund managers surveyed indicated they plan to be overweight on domestic stocks.
The most preferred stocks are banks, general industrials and food producers. Sentiment towards gold, telecoms and real estate are least favoured. Food producers and retailers rose up the ranks the most.
A significant number of managers see the equity market as undervalued and see more buy than sell opportunities.
“The report indicates a shift in sentiment, with bond bulls remaining strong while equity bulls have weakened. Total returns for equities are projected at 13%, with local bonds expected to outperform initially, followed by equities,” the survey reads.
“Consumer sectors are gaining ground over financials, indicating changing investor preferences amid economic conditions. The survey reflects a more defensive stance among managers, with a preference for domestic assets over offshore ones. Key sectors of interest include banks, general industrials, and food producers.”
The results of the Bank of America study mirror the view held by Cape Town-based investment firm M&G Investments Southern Africa.
The money manager, previously Prudential Investment Managers, said in December that based on valuations, SA is the place to invest in 2024 rather than offshore, and particularly not in US equities.
Specialist wealth management company Citadel is also bullish on bonds in that the markets are looking to be compensated for the implied risk of investing in SA given the country’s fiscal position.
The prevailing view is that SA stocks are undervalued, while other asset managers have warned that the low valuations might be a value trap.
One of the silver lining for SA Inc is that the domestic inflation outlook is improving and the global interest rate environment turning.
It is also widely expected local rates will begin to come down by midyear, giving a boost to consumers, which bodes well for consumer-facing stocks.
Old Mutual Wealth Investment strategist Izak Odendaal said high interest rates and inflation are probably not as big obstacles to growth as Eskom and Transnet are, and that market-based interest rates will remain high no matter what the Reserve Bank does.
He added that repo rate cuts later this year will give consumers some breathing room, but the economy needs a meaningful improvement in its supply-side performance.
“Putting this all together, the implication for asset allocation is that we can be cautiously optimistic about the year ahead — the runway is in view — but investors should not get carried away. Given that there is so much uncertainty on so many terrains — policy, politics, geopolitics — investors should always be prepared for a bumpy ride,” Odendaal said.
Head of fixed interest at asset management firm Coronation, Nishan Maharaj said a further deterioration in fundamentals from here will result in a further widening of SA bond yields.
“We would be remiss in not acknowledging that the SA bond market is but a tiny cog in a much larger, macro bond landscape. Therefore, major changes in global bond valuations will have a significant impact on local bond performance,” said Maharaj.
“The current path of US monetary policy will dictate the path of US bond yields and, hence, have a significant impact on local bond yields as has already been the case in the last quarter.”
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