Goldman Sachs has released a bullish report on the JSE equities market, saying the market has not yet priced in the “positive inflection point” that could result as economic growth accelerates and SA potentially gets a ratings upgrade.
The JSE’s huge rally this year has been driven largely by commodity stocks, particularly gold and platinum, with domestic financial and cyclical stocks largely flat.
But the New York-based investment bank’s analysts argue the domestic stocks have yet to price in the economic acceleration it expects as inflation and interest rates decline, as the Reserve Bank projects they will now that the Bank has cut its inflation target to 3%.
It reflects that Goldman’s inflation and interest rate views are more dovish than some of its peers, and it views government’s fiscal plans as more credible.
Economist Andrew Matheny’s view is that SA’s economy has already taken much of the pain needed to get inflation down towards the target, with interest rates higher than they might otherwise have been — which is why he does not share the scepticism about the Bank’s scenarios, which see as many as five interest rate cuts in the next few years.
“In contrast to the mainstream view, we see the growth shortfall as largely cyclical, held back by headwinds such as restrictive monetary policy,” Matheny and Goldman Sachs equities analyst Sunil Koul and their colleagues say in the report.
“As these headwinds fade and as supply constraints ease (for example in energy and logistics), we forecast that growth will accelerate from 1% in 2025 to 1.6% in 2026, reaching about 2.5% in the medium term.
Concentrated
“If combined with fiscal consolidation, this potentially supports a case for sovereign credit rating upgrades — a positive inflection point that we think is not yet priced into SA assets,” says the report.
After being stuck for much of the past three years, SA equities broke out this year.
The MSCI SA index has rallied nearly 30% in rand terms and 40% in US dollar terms for the year to date, outperforming the broader MSCI emerging markets index, which is up 18% for the year to date.
Key points
- JSE rally driven mainly by commodities (gold, platinum)
- Economic growth to improve as inflation and interest rates decline.
- Potential sovereign credit rating upgrades not yet priced into SA assets.
- MSCI SA index up ~30% in rand terms
- Gains led by commodity exporters and Naspers.
- Domestic sectors (banks, retailers, industrials) remain undervalued
- 72% of SA fund managers bullish on equities (Bank of America survey).
- Gold price forecast: $3,700/oz by end-2025
But the report notes that the strong SA performances have been concentrated in a few pockets. Commodity exporters (largely gold and platinum group metals miners) are up about 100% and Naspers has rallied 40%.
“Together these two contribute nearly 90% of the year-to-date gains,” says the Goldman Sachs report.
“That said, the rest of the domestic market — financials and domestic cyclicals — has been largely flat year to date and trading inexpensive relative to their historical range, suggesting domestic equities are yet to price in any economic acceleration,” it says.
Domestic pockets of the equity market, including banks, retailers and industrials as well as telecom and consumer staples, are positively geared to the domestic growth cycle but have lagged exporters by a wide margin. “We think a pickup in local growth could trigger a rotation from exporters ... towards laggard domestic cyclicals,” say the analysts.
The Bank of America fund manager survey for August found that a high 72% of SA fund managers were net equity bulls, up from 67% in July, and the proportion of “cash bears” was the fourth highest in the history of the survey, which strategist John Morris said was supportive of equity returns.
Caution
But Terebinth Capital’s Carmen Nel sounded a note of caution in an article in Pensions World last month, saying the market might be underappreciating the frictional costs of moving to a lower inflation target.
“With regard to equities, a nascent rerating may be countered by slower earnings growth, as selling prices may be forced to adjust more rapidly than input costs,” she wrote. “Moreover, the required tight monetary policy stance in the early phase of the transition is designed to ensure demand-led inflation is suppressed, in a bid to achieve the new lower target. This could limit the growth recovery, with the risk of earnings expectations being missed.”
Goldman Sachs also made global headlines last week with a bullish report on gold, which it said could reach $3,700/oz by end-2025 and $4,000 by mid-2026, especially given US President Donald Trump’s attack on the independence of the US Federal Reserve.
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.