The news last Monday that BioNTech and Pfizer’s Covid-19 vaccine was 90% effective in clinical trials sent shares rocketing. The news was unexpected, and global markets rallied. JSE-listed banks had their best day in years, with some shares up over 10% on the day.
The trade was logical. An imminent vaccine would mean a return to ‘normal’ and the risk of crippling lockdowns would recede. The theory is that the worst would be behind us and all the bad news is already priced into (particularly bank) shares.
There was a separate boost from news that Joe Biden had won the US presidential election, which would likely see a de-escalation in the trade war with China. Fears that Biden’s election would mean higher taxes and a weaker dollar over time seem to be misplaced as the Democrats will likely struggle to push through any tax increases in the next two years, given that, for now, Republicans control the Senate. The January run-offs in Georgia are critical to any aspirations the Democrats have of controlling both houses.
|Seven-day move||Year-to-date move|
|Standard Bank Group||12.35%||-25.19%|
Source: Profile Data
Coupled with this was a further theory that investors had started rotating from growth stocks (chiefly tech), trading at stretched valuations, to shares that offered value. This is one of the reasons the JSE has performed so poorly in the last five years. Money was favouring growth (in developed markets) at almost any price. As an emerging market, most stocks on the JSE (Naspers/Prosus excluded) were simply unattractive. Now with the trend seemingly reversing, these companies – many of whom are trading at historically-low multiples – are a lot more appealing. The bull case going forward is that this rotation plays out and that so-called ‘SA Inc’ shares are beneficiaries of the switch.
Goldman bullish on three counts
A recently published note by Goldman Sachs suggests investors should be “long emerging market banks versus consumer staples”. It says “banks emerged as one of the worst-performing sectors in Q1 and so far have only recovered a quarter of the value lost”.
It adds: “The underperformance has been driven by multiple factors, including rising non-performing loans and, in some cases, asset purchase programmes and deep rate-cutting cycle, flattening curves and eroding net interest margins.
“We push back against the view that these headwinds will be sustained,” it says.
“The NPL [non performing loan] cycle already appears to be significantly priced in across EM [emerging markets], with current valuations already accounting for a rise in bankruptcies.
“We have found that the earnings cycle of banks in high-yielding countries … are inversely correlated with the level of interest rates and are less impacted by the slope of the yield curve.
“Central banks across EM have cut rates sharply since the start of the coronavirus crisis, and we would expect a credit growth rebound as activity recovers, with the potential for a vaccine to unlock the current value in bank sectors. Our preferred countries for a positive banks expression are Brazil, Russia, India, Mexico and South Africa, where earnings appear more tied to credit growth than net interest margins, and where a significant round of NPLs already appears to be factored into bank valuations.”
An additional fillip is provided by another relevant trade for our market: “long a roughly volume-weighted basket of MXN [Mexican peso], ZAR [South African rand] and INR [Indian rupee] versus USD [US dollar]”.
The bank says it first initiated this latter trade on October 9, because “emerging market high-yielding foreign exchange is one part of the emerging market asset complex where deep value still resides, suggesting more room to run from here”.
It says the peso and rand “each offer an attractive combination of high carry, undervaluation and high exposure to a cyclical upturn”.
Finally, a third boost comes from the investment bank’s call to be long SA government bonds (SAGBs).
It favoured the 10-year bond earlier this year but switched its preference to the six-year bond (R186) just before midyear “to maximise carry relative to duration and issuance risk”.
It says “while the country’s fiscal picture remains a source of concern for longer-term local asset returns, we would argue that yields on offer are still sufficient to compensate for the underlying risks”.
“The SAGB rally has of course compressed these risk premia, but on a relative basis, in a world that remains more starved of yield going into 2021 than initially anticipated, we still think that SAGBs is an attractive trade.
“We open the recommendation [with a yield target of 6% and a stop of 7.75%] in USD-hedged terms, but given the rising [foreign exchange] FX-hedging costs and our constructive view on the rand, we also see upside potential in FX-unhedged longs.”
Earnings view remains subdued
At the UBS SA Financial Services conference held about a month ago, Nedbank shared its “current thinking” with the warning that “in the current environment it is extremely difficult to provide accurate guidance”. It is important to note that these are not formal forecasts (these will likely be shared at the group’s full-year results early next year).
It shared combined broker forecasts for the country’s five main retail banks from Iress as at October 8. Based on this, says Nedbank, and assuming current GDP recovery forecasts as well as banks’ credit loss ratios getting back into through-the-cycle ranges, “headline earnings could get to 2019 levels around 2023”.
Nedbank says its cost-of-equity is forecast at approximately 15% from 2020 to 2023, driven by higher long-bond yields and risk premiums. Its “thinking” is that the bank’s return-on-equity will only return to a higher level than the cost-of-equity a year later than the earnings recovery (i.e. 2024).
Dividends could resume from the first-half of next year, provided the Reserve Bank withdraws guidance note number 4, and conditions do not worsen from this point.