South African fund managers surveyed by the Bank of America (BofA) are expecting local equities to rally post next week's elections with a preference tilted towards domestic stocks, although political risks are rising.
In its latest South Africa Fund Manager Survey, BofA said yesterday local fund managers had flagged uncertainty ahead of the election, but were optimistic that domestic stocks would rally post the election.
“The focus has shifted from resources to domestics. A higher net 68% would overweight domestic stocks but still a 50/50 tussle on whether it's too early to buy interest rate sensitives,” read the report.
“Political risks rising, but 74% expect domestic stocks to rally post elections May 29.”
South Africa holds a crucial election against the backdrop of high unemployment, plunging mining productivity and elevated inflation.
Analysts and pre-election polls have suggested that President Cyril Ramaphosa’s ANC will fall below the 50% majority threshold, necessitating a coalition with smaller opposition parties.
BofA said positioning was currently “rising in heavy industrials and consumers”.
A net 79% of surveyed fund managers said South African equities and bonds were currently undervalued, presenting significant upside potential post the elections.
Although the Constitutional Court this week ruled that former President Jacob Zuma was disqualified from being a Member of Parliament at least until 2027, Ramaphosa and his ANC are still expected to face great opposition from the DA, EFF and MK Party.
Analysts at Fitch Ratings-run BMI said last week that the risk of an uprising could tip South Africa into volatility post the election.
BofA’s survey results showed 37% of respondents wanting to invest cash in local assets, although there were no managers who wanted to add to cash.
Still, a lowly 21% of respondents said they wanted to invest abroad.
Despite the positive outlook for domestic stocks, fewer respondents saw reforms in SA accelerating post the election.
This, as South Africa still has problems around a poor skills outcome framework, wage rigidity, government intervention, and policy and delivery failures, with state-owned enterprises and municipalities in the logistics, electricity and water still encountering hurdles.
A long-term rising debt profile was also a cause for worry.
Other analysts and market watchers are of the view that “South Africa's stocks remain attractively valued vs the S&P 500 and other emerging” markets.
Paul Stewart, managing director for Merchant West Investments, said investment opportunities still existed in South Africa, in spite of current challenges.
“Even after adjusting valuations for the low growth environment, our equity and bond markets are as cheap as they have been since 1994,” Stewart said.
Last month, the BofA fund manager survey showed managers increasingly focused on miners and gold, whose price has been on a runaway streak as the consumer sector faded in light of elevated inflation, stubborn interest rates and uncertainty around the political framework.
A higher proportion of fund managers surveyed by the financial institution in April were at the time, “thinking buying resources” for the “first time” in six months.
"Prior surveys highlighted negative sentiment indicating a 'bottom or near bottom'. A lower net 59% would overweight domestic stocks (while) a low net 6% say it is 'too early to buy interest rate sensitivites,” it said in its report then.
BUSINESS REPORT