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Johannesburg - South Africa’s record-breaking stocks are a hard sell right now.
While Johannesburg’s benchmark index closed at an all-time high on Friday, political manoeuvering expected over the next four months is causing foreign investors to limit their bets.
The ruling African National Congress is due in December to pick a successor to President Jacob Zuma as party leader in a contest that so far has no clear front-runner.
“Tensions within the ANC have been rising, and the next leader will shape not only the party’s future, but also the country’s structural outlook,” said Soledad Lopez, an emerging-market strategist at UBS in New York. “The outcome of the ANC leadership race is too close to call. We expect volatility to continue as political uncertainty might increase in the run up to the ANC elections in December.”
The 12% gain in South Africa’s main stocks gauge this year is less than half the 26% advance by its emerging-market peers. That partly reflects unease among investors over management of the economy under Zuma, who fired his respected finance minister in March, and concern that the ANC won’t select a candidate focused on reinvigorating the economy or decisively tackling corruption. Zuma’s term as president ends in 2019.
Foreign investors have sold a net R65bn of South African stocks this year, following sales of R124bn over the whole of 2016. HSBC said in July “there are more exciting opportunities elsewhere” as it cut South African equities to neutral from overweight.
Zuma is ensuring that he anoints his successor, Jefferies Hong Kong chief global equity strategist Sean Darby said earlier this month, just after the president survived an eighth bid by opposition lawmakers to remove him in a no-confidence vote. Jefferies maintained its bearish view on South Africa within its global asset allocation.
Here are further comments about South African stocks:
UBS (Lopez):
“We are underweight MSCI South Africa in our emerging market intra-equity strategy. We also have a cautious view on South African sovereign debt and the rand.
"MSCI South Africa is trading above 20 times 12-month-trailing P/E, well above its 10-year average.
“In our view, the market is trading at expensive valuations amid low earnings growth.
“We continue monitoring the political dynamics ahead of the ANC conference in December, the rating announcements and also the fundamentals such as fiscal policy and growth-inflation dynamics.”
CITIGROUP (Alec Schoeman, head of equities for South Africa):
“There is no doubt that investors are underweight South African equities overall, it’s partly the consequence of the turmoil that we’ve got in terms of the lack of transparency on a policy level when it comes to the economy.
“Emerging-market funds and analysts are doing a tremendous amount of work on South African stocks and updating their models, re-looking at their valuations and even second-guessing themselves about their lack of position on South Africa.
"But it feels like the next step, the leap of faith that leads to fund managers buying, is not happening because of the lack of transparency and predictability about the future. Very few people are looking beyond the next six months.
“South Africa is under-owned, it has underperformed and it’s viewed as being underwhelming in terms of future prospects, which is unfortunate,” Schoeman said. “Our clients are saying that Russia is a safer place to put your money than South Africa.
“Part of it is due to politics, part is due to a lack of good data coming through and the bears are expecting that we see this kind of stagnation continue. It’s also a consequence of the relative prospects of other investment destinations.”
AEON ASSET MANAGEMENT (Asief Mohamed, chief investment officer):
“Markets are currently pricing in an environment of a benign uncertain political outlook for South African equities.
“Uncertainty from a political or policy perspective will most likely be with us until the next general election in 2019."
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