Analysts say SA's stock rally may come to an end soon

By Adelaide Changole Time of article published Jun 2, 2020

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JOHANNESBURG - Gains in South African stocks based on easing lockdown rules may not last as the country grapples with the damage wrought by the coronavirus pandemic, as well as structural challenges that saw the economy slip into a technical recession in 2019, according to analysts.

The FTSE/JSE Africa All Share Index rose as much as 2.5% on Monday after a change in the national disease-alert level allowed most people to return to work for the first time since the lockdown was instituted on March 27. The gauge has rallied 35% since hitting a seven-year low on March 19.

Yet, according to Michele Santangelo, a money manager at Independent Securities in Johannesburg, the domestic economy “is in deep trouble” and the government has limited ability to assist.

“It will likely take a few years before SA Inc. companies see a normalization of their businesses,” Santangelo said by email. “I am not optimistic for SA Inc. stocks for the remainder of 2020.”

Here’s a summary of what analysts are saying:

Santangelo

Financials look very cheap on a historical basis, but with so much uncertainty regarding impairments and pressure on net interest income as a result of South Africa’s interest rate cuts, it is difficult to forecast their performance in the short term until such time as economic activity begins to normalize.

SA Inc. companies in the industrial and retail sector will struggle from a demand point of view as more smaller businesses go out of business and unemployment skyrockets, leaving less discretionary spend in the economy.

SA Inc. has been a laggard compared to many other emerging-market and developed markets and this trend is likely to continue.

“SA Inc. is cheap, but it is cheap for good reason. This is not to say SA Inc. stocks cannot rally from current levels as overall investor sentiment bottoms out and begins to improve.”

Lulama Qongqo: Mergence Investment Managers

While it’s “great” that lockdown is being eased, the reality is that many sectors still cannot operate. Those that can have had to cut salaries, decrease their staff bases or both. 

People who cannot work, whose salaries are cut or those that no longer have jobs cannot spend money they don’t have.

There are also companies that supply goods and services into sectors that are not operating and they too cannot generate income even if they are open.

Easing the lockdown will simply ease the pain of sectors that were forced to closed.

“JSE listed companies are in for a tough year still and there remains more downside risk versus upside risk.”

Casparus Treurnicht, Gryphon Asset Management

“I do not see South Africa recovering from the unemployment surge soon.”

The economy will only get back to 100% this time next year at the earliest, most likely only at the end of next year. There is a permanent damage that was dealt to the economy and its people.

All retailers will suffer throughout the cycle. Woolworths food did well, but the aftermath of the slowdown is still coming. Retailers like Dis-Chem Pharmacies Ltd. and Clicks Group Ltd. are probably a good choice, but they are too expensive to own.

“I am negative on equity markets at the moment. Whether there will be a prolonged slowdown or a correction in markets we will need to see.”

Stephen Meintjes: Momentum Securities

Nobody knows how much of the economy has suffered permanent damage, but the fact that shops can now sell most products, except tobacco, will make a massive difference as many informal businesses can resume.

The main remaining bans are on social activity, gatherings, restaurants, bars etc. So the tourist industry remains in the cold.

The upsurge of infections in the mining industry as workers return from lockdown, in many cases from the rural areas, is of concern and may delay the resumption of production significantly.

BLOOMBERG 

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