Fund managers turn positive on SA equities as cheaper emerging market becomes more attractive to investors. File Photo: IOL

JOHANNESBURG – Merrill Lynch SA and Goldman Sachs yesterday outlined an upbeat view on South Africa, charging that the country’s stock market would recover from last year’s rout.

A study conducted by the two lenders showed that fund managers have become bullish this month on equities for the first time in a quarter.

Merrill Lynch said it expected the FTSE/JSE All Share Index to hit the 61 000 mark this year and earnings per share to grow by 12 percent.  

Last year, the index climbed to a record high of 61 684 when President Cyril Ramaphosa took office, before ending the year on a weaker footing.

Merrill Lynch said weak earnings would remain a key market concern, while the land reform fears had evaporated.

John Morris, South Africa strategist for the company, said in an investment strategy note that fund managers were now firm buyers of equities.

“The equity market is seen as the most undervalued since October 2011. The response is the second-largest improvement since February 2000,” Morris said.

“A fewer net 53 percent of managers see more buy than sell opportunities, but the last four monthly readings remain high (the strongest since September 2011).”

The study showed that fund managers' preferred sectors were banks, general miners and food and drug retailers.

Asief Mohamed, chief investment officer of Aeon Investment Management, said only Naspers was buoyant in the past five years.

“It is not surprising that fund managers have turned positive on the prospects of South African equity returns. Emerging market equities have also become cheaper relative to developed market equities,” he said. 

Merrill Lynch said 54 percent of respondents were comfortable with the pace of reform and 62 percent expected the ANC to win the general elections with a 55 to 60 percent majority.

The rand strengthened more than 5 percent against the dollar to record its best start to a year.

“Ramaphosa’s ANC is seen as leaning increasingly towards centrist policies, which can incentivise growth-friendly economic reforms, and away from populism,” Investec’s Annabel Bishop said. 

“This has meant that the ANC, and the political landscape, is increasingly seen as likely following a more favourable approach to stimulate economic growth… a positive for the rand.”

Izak Odendaal, of Old Mutual Multi-Managers, said the local economy would continue to gradually improve from a surprisingly weak first half, supported by further gradual policy reforms and higher consumer spending.

“But ultimately our share prices are set in a global context. As long as global growth remains reasonable, and there are no further episodes of emerging market risk reversal (that is, massive capital outflows and an exchange rate slump), 2019 should be a better year for the local market,” Odendaal said.

Goldman Sachs recommended modest allocation to South African equities.

It said the JSE would benefit from Naspers, whose subsidiary Tencent stood to benefit from the resumption of game-licence approvals in China.

The investment bank said last year featured an exodus from risk assets on a scale typical during recessions. 

It said global equities forfeited nearly $20 trillion (R272trln) of market capitalisation.

The company added that it expected a high single-digit total return in South Africa’s stock market, due to corporate earnings growth outpacing that of other emerging markets and improving economic momentum.

“Here, we are drawn to improving economic growth, strong earnings growth, attractive equity valuations and favourable sentiment and positioning among institutional and foreign investors,” Goldman Sachs said.  

The company warned that the trade war between the US and China was likely to soften overall business sentiment and create more difficult external borrowing conditions for countries such as South Africa with its current account deficit.  

“We believe that it (the trade war) cannot be resolved simply through China importing more US goods.” 

BUSINESS REPORT