Investment managers may be slightly less gloomy about South Africa than they were three months ago, expecting interest rates, inflation and the rand exchange rate to level off, but the threat of dysfunctional state-owned-enterprises, particularly Eskom and Transnet, remains a dark cloud on the investment horizon.
The monthly Bank of America survey of South African institutional fund managers offers helpful insights into how investment professionals view South Africa’s (and the world’s) economic and investment prospects. The April survey was conducted between April 6 and 13, and reflects the views of 14 managers.
Investment markets
* SA equities: Managers are a lot more uncertain now than they were in February of where domestic equities are headed in six months: 29% said up, 21% said down, another 21% said the market would be flat, and 29% said they didn’t know. On a 12-month view, 36% of the managers were positive (bullish) on domestic equities, down from 59% in February. On share valuations (the price of a company’s share compared with its profitability), most managers regard South African listed companies as undervalued (64%, up from 59% in February). The managers are negative (bearish) on the mining sector over 12 months, though not as negative as in February (21% “most bearish”, down from 24%).
Since February, none of the managers has been bullish on mining shares. Favourite sectors are health care and financials, while real estate and telecommunications are least preferred. On a positive note, the managers estimated total returns from equities over 12 months to be 13%, on average.
* SA bonds: Managers are becoming more positive on domestic bonds. On a 12-month outlook, 29% of them were “most bullish”, up from 18% in February. On government 10-year bonds, 43% said they were undervalued and the remaining 57% said they offered fair value. However, 36% were uncertain about making changes to their bond allocations over the following three months. Total returns over 12 months were expected, on average, to be 12%.
* Offshore allocation: While none of the managers indicated that they would decrease their offshore allocations over the next three months, a large percentage (43%) “didn’t know” (down from 53% in February). More than a third (36%, down from 41% in February) said they would increase their offshore allocations, while 21% (up from 6% in February) said they would maintain them.
* Cash: Despite the uncertainty, there appears to be a swing away from cash. Although 57% indicated that they held more cash (were “overweight”) relative to their internal benchmarks (up from 35% in February), half of them (50%, up from 35%) said they would decrease their cash allocations over three months, while none of them said they would increase cash. Total returns from cash over 12 months were expected, on average, to be 9%.
Economy
There was less uncertainty about the direction of the South African economy. Most managers (43%, down from 65% in February) said they expected our economy to “get a little weaker” over 12 months, while 29% (up from 12% in February) said it would “get a lot weaker”.
* Risks: Most managers (57%) agreed that the crises at Eskom and Transnet posed the biggest risks to South African equities, followed by lower company profits. A fair portion of them (29%) reckoned the risk of a total blackout was “high” or “very high”. They did not perceive the government to be accelerating reforms, and the country “still had major problems”, including poor skills outcomes and service delivery failures.
* Inflation: Almost three quarters (71%, up from 65% in February) of the managers said they believed inflation would drop slightly over 12 months.
* Interest rates: Managers indicated that the repo rate, increased in March to 7.75%, was unlikely to increase further and would remain around this level on a 12-month view, possibly dropping slightly.
* Rand/dollar exchange rate: This was likely to stabilise and remain at just under R18 to the dollar over 12 months.
SME Index
Another study shows that the energy crisis is having a serious impact on local small- to medium-sized enterprises (SMEs). The Business Partners Limited Q4 2022 SME Confidence Index shows SME confidence in the local economy over 12 months to be 64% – a 13 percentage-point decrease from the previous quarter.
David Morobe, the executive general manager for impact investing at Business Partners, which finances small businesses, says: “The energy crisis has had a ripple effect across the SME sector, with many businesses facing severe financial losses related to a loss of revenue, supply chain disruptions and a drop in productivity. With load shedding expected to persist indefinitely, accessing a reliable source of power is imperative to business continuity and should be treated as a top priority. This might be a challenge for 27% of SMEs surveyed, which indicated that they could not afford to invest in alternative energy solutions.”
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