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Bearishness rises in SA after market rally

Fund managers more cautious after JSE All Share Index gains – BoA Merrill Lynch survey.

Some South African fund managers are increasingly bearish about stocks after a market rally in the first quarter, according to a new survey by Bank of America (BoA) Merrill Lynch.

As the JSE All Share Index surged to about 58 700 on Friday, from about 50 000 in December, just a quarter of 12 fund managers surveyed between April 5 and April 11 said the market would be higher in six months.

That’s down from the 57% who said in February that the market would continue to gain, according to the data.

“The fact that the market had rallied causes managers to be more cautious over the next six months,” John Morris, South Africa strategist at Bank of America Merrill Lynch and survey report author, said in a phone interview on Friday. “They’re wary of the rally because we are in a soft-growth environment.”

Slow growth

South Africa’s economy is expected to grow by just 1.2% this year, the lowest in sub-Saharan Africa except for Angola, according to the International Monetary Fund. The government has recently staved off more rolling blackouts by power utility Eskom after outages in the first quarter, but it remains to be seen if they resume after the May 8 national election and further dent GDP.

Tying in with the increase in a bearish outlook on equities, the survey also showed that fund managers are shifting to government bonds, faster than they have since 2000. Money managers who expect South Africa to leave the World Government Bond Index (WGBI) in the next two years, because of a potential downgrade to below investment grade in the country’s debt by Moody’s Investors Services, rose to 50% from 38% in March.

“The fact [is] that there are more managers expecting South Africa to leave the WGBI – if that event were to take place – and managers would certainly be looking to buy bonds from foreigners on that volatility,” says Morris. “Besides the elections and reform, which is on managers’ radars, including offshore investors, that will be another issue to watch very closely after the October budget [when Moody’s is next expected to assess the country’s debt].”

What is your biggest domestic risk to SA equity performance?

Election impact

General mining stocks replaced tobacco last month, and banks in February, as the most preferred sector in a 12-month outlook, with fund managers reducing their stance in line with how much they expect the ANC to win the May 8 ballot, the data shows.

Morris says general mining’s rise in the survey could be due to Chinese demand, thinking that the dollar could weaken or that a weaker rand could help drive ore exports. “The sector performance has been very good if you look at the levels from December to now – iron ore prices were moving higher, and commodities have been doing well year-to-date.”

The survey showed that 42% of fund managers expect the ANC to win a majority of 50% to 55%. Last month 62% predicted an ANC majority of 55% to 60%. Morris downplayed the result because of the small survey sample.

A poll of 3 500 people released last week by research firm Markdata shows that the ANC is expected to win a majority of 59%, with 21.3% for the Democratic Alliance and 12.1% supporting the Economic Freedom Fighters.

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But Old Mutual only two weeks ago said the JSE would be the best performing stock market in the world over the next 5 years. As the famous quote goes, “she would say that, wouldn’t she?”

I’m presuming that the 33.3% risk is Weak Earnings … not Eeak Earnings? I’m surprised the a Weak Consumer is a no-show.

Surely inflation and a lack of consumer spending power are more immediate than Policy Shifts?

Hardly a well conceived piece of research.

On 26 April Patrick Cairns said “the market is now rerating to more reasonable levels that should be sustainable.” So, who is correct here?

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