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Cheap banks to lead JSE rally on low US rates, says RMB

Banks would lead a rally in local stocks that might last 18 months as record low US interest rates spurred emerging market gains, Rand Merchant Bank (RMB) Asset Management said yesterday.

Lenders might jump 40 percent because valuations as low as 10 times annual earnings compared with multiples of 15 for the JSE’s all share index. FirstRand trades at 10.2 times earnings, compared with 13.9 for the MSCI emerging market index, data show.

“Banks are truly cheap at the current valuations,” said Wayne McCurrie, a portfolio manager at RMB. Stock gains would be stoked by earnings growth of up to 30 percent.

Africa’s biggest stock gauge might climb 10 percent to 15 percent over the next a8 months as the global economic recovery boosted corporate earnings while the Federal Reserve avoided tightening monetary policy, McCurrie said.

RMB’s outlook contrasts with a more bearish view from Investec Asset Management. Stocks were “significantly overvalued” after the surge in metals prices in the past two years boosted Anglo American and BHP Billiton, Sam Houlie, the head of South African equities at Investec, said last week.

FirstRand has tumbled 8 percent from its peak on January 13 and Absa, South Africa’s biggest retail lender, has lost 5 percent to value its shares at 11.98 times annual earnings, data show. Absa’s bad debt, which rose almost fourfold between 2007 and 2009, fell 33 percent to R6 billion last year, the bank said recently.

Growth in borrowing by South African households has slowed to 5 percent from as much as 27 percent in 2006 as the country recovers from the 2009 recession.

The benchmark repo rate of 5.5 percent, the lowest in 30 years, and an inflation rate of 3.7 percent, 50 basis points above the slowest pace in five years, will boost prospects for increased lending by banks, according to McCurrie.

Standard Bank said its personal and business unit returned to profitability and registered a 5 percent advance in new mortgages for the year to December. The company has gained 7.8 percent since March 15, lifting its valuation to 13.9 times annual earnings.

“There’s huge bad debt unwinding in the banking sector and that’s why we think the banks will rise,” said McCurrie.

Share gains would be stoked by group earnings growing about 30 percent next year.

Anglo American, which makes up 11 percent of the all share index, has lost 11 percent since February 15 as metal prices fell on concern Japan’s earthquake would stem demand. The company’s stock is valued at 9.1 times earnings, while BHP Billiton, which comprises 13 percent of the index, is trading at a price:earnings multiple of 12.5.

Commodity shares “are very good, but the shares aren’t cheap”, McCurrie said, adding that RMB was not buying diversified base-metals producers, including Anglo American and BHP Billiton. – Business Report

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