CAPE TOWN – The Bank of America Merrill Lynch (BoA ML) said South African equities contribute to almost one half of their top 20 emerging market (EM) stocks based on the weighted average of six quantitative screens.
All South African equities, which are also buy-rated by their analysts, come from the materials sector, namely AngloPlat, Harmony, and African Rainbow Minerals. The other South African equities that are highly rated are Sibanye, Implats, Gold Fields, RMI Holdings and Fortress Income Fund “A”.
They note that this bullish view for the start of 2020, is supported by strong seasonality effect as the first quarter tends to be pro-cyclical based on data since 1987 with EM as the best performing region.
From a macro perspective, BoA ML turned bullish on South Africa in September, so for them it was encouraging to see this view supported by their quantitative top-down ranking as well. This higher ranking is driven by earnings growth and strong momentum as they expect 20 percent earnings growth this year with a 30 percent increase in the materials sector making it the best performing sector in the EM universe.
Their commodity price forecasts for 2020 saw precious metals such as gold, palladium and platinum gaining in price this year.
BoA ML expect the gold price to average $1,494 per ounce in 2020 and forecast a further rise to $1 550 in 2021.In response to the escalating tensions between the US and Iran, President Donald Trump has threatened to slap sanctions on Iraq after their Parliament voted to expel US troops, while Iran said it will no longer abide by uranium enrichment limits.
Gold has soared to the $1 600 an ounce level, its highest in more than seven years, as investors seek safe havens.
BoA ML maintain a bullish view on platinum group metals (PGMs) with the palladium price continuing to trade higher than the platinum price.
Their forecast for palladium is an average of $1 638 per ounce in 2020 easing to $1 300 in 2021, while platinum is expected to average $1 100 this year rising to $1 300 in 2021.
“The platinum market is rebalancing as South Africa's producers have cut production. Palladium is trading at a record high on sustained deficits. Substitution with platinum may increasingly kick in,” the analysts wrote.
The US Environmental Protection Agency (EPA) is seeking public input on new rules which will significantly decrease emissions of smog-forming nitrogen oxide (NOx) and other pollutants from heavy-duty trucks, and will so boost demand for PGM-containing exhaust catalysts.
The Truck and Engine Manufacturers Association, which represents the four largest truck makers in North America is backing the initiative. The EPA last toughened NOx standards for highway heavy-duty trucks and engines in 2000.
In response to global warming, many countries are tightening up on fossil fuel emissions. This is seen in the case of Norway, where fully electric cars made up 42.4 percent of sales last year, a global record, rising from a 31.2 percent market share in 2018 and only 5.5 percent in 2013.
Norway currently exempts battery-powered vehicles from the taxes imposed on petrol and diesel engines. It aims to become the first country to end the sale of fossil-fuelled cars by 2025. Other countries are expected to follow Norway’s lead.
BoA ML are bullish on nickel due to increased demand for this battery metal. They see it rising to $20 000 per ton in 2021 from $17 375 in 2020 and $14 190 in 2019.
“Nickel demand from electric vehicle producers should rise in the coming years. Indeed, we expect the market to stay in deficit. In fact, nickel remains the go-to commodity to gain exposure to rising electric vehicle sales,” they concluded.