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An equity guide to Ramaphosa: winners and losers in SA

Feb 15 2018 16:21
Neo Khanyile and Thembisile Dzonzi, Bloomberg News

Johannesburg - Equity investors reacted with euphoria to Jacob Zuma’s resignation as South African president, with stocks soaring the most in more than three years.

Cyril Ramaphosa, who was elected as Zuma's successor on Thursday afternoon, is expected to pursue market-friendly policies.

Economic growth averaged just 1.6% a year while Zuma, who quit late on Wednesday, was in office, undermined partly by a series of policy missteps and inappropriate appointments that rocked confidence.

Since Ramaphosa’s election in December as leader of the ruling African National Congress set him on course to replace Zuma, South Africa’s rand has risen 12% against the dollar, more than any other currency.

"South African-linked stocks are having a strong rally on the back of the stronger currency," Patrice Rassou, who helps manage about $35bn as head of equities at Sanlam Investment Management, said by phone from Cape Town. "That’s linked eventually to stronger consumer and business confidence in South Africa, which would translate to greater economic activity and higher economic growth."

Sentiment among foreign investors is strong for the moment: they have been net buyers of South African stocks for the past six days, JSE figures show. Reversing outflows of the past two years would require $12.7bn of net purchases, and South Africa needs $25bn of inflows to catch up with emerging-market peers, Investec Bank said in a note earlier this week.

Conservatively, the bank estimates some R100bn ($8.6bn) of inflows, "should global confidence around South African equity improve."

Here’s an assessment of how South African stocks may fare under a Ramaphosa-led government:

Winners:

Banks and financials

Ramaphosa is likely to change the cabinet and then start implementing structural reforms, which would improve sentiment at ratings companies, says Rob Pietropaolo, a trader at Unum Capital. Financial stocks have "a hell of a lot of potential" should South Africa stick to a path of structural reforms.

Johannesburg’s index of banking stocks jumped more than 7% to a record on Thursday.

Retailers

A stronger rand should keep inflation below the midpoint of the central bank’s target range and therefore lead to the potential for two or three rate cuts, whereas six months ago rate increases were seen as likely, said Rassou at Sanlam. That’s a boost to consumer confidence and supportive of disposable income.

'South Africa Inc.'

Shares of companies that are focused on the domestic economy, such as Bidvest Group and Remgro, rallied on Thursday and are likely to continue to benefit from gains in the local currency, said Pietropaolo.

Mining

Local plays in the mining sector, Anglo American and platinum stocks, which would have been weighed down by uncertainty surrounding new rules for the industry in the proposed Mining Charter, will benefit from optimism that Ramaphosa will pursue an investor-friendly approach, said Rassou.

"When emerging markets are in favor, then commodities start to pop up their head and that will filter through to our miners," said Pietropaolo. "So I do think this still has legs.

Losers

'Rand hedges'

Companies that benefit from rand weakness may lose favor with investors if the rand continues to power ahead. "The pure rand hedges will come under pressure as the impacts of the stronger currency come through," said Rassou. "Some of them will be able to offset that through some pricing power, hopefully playing in a strong global environment, but the reality is they might suffer a bit."

Small caps

Investors are likely to move money out of smaller companies to bet on larger stocks during the Ramaphosa rally, said Pietropaolo.

Property

Property companies which went offshore in search of better returns are underperforming the more South African-based ones, said Rassou. "Property is down, but that’s got nothing to do with the actual political events," said Pietropaolo.

"They have been out of favor for the last couple of weeks. I think if it wasn’t for the good news they would have probably continued to get hit."

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cyril ramaphosa  |  sa economy  |  markets  |  sa politics  |  stocks  |  equities
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