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BofA sees Eskom among risks to spoil brief SA rally

‘Investors are getting impatient and are looking for opportunities elsewhere’ – investment strategist.
South African assets could enjoy a first-quarter rally, supported by alluring valuations and more upbeat global sentiment. But that’s set to evaporate as local risks including the beleaguered state power utility deter investors, according to Bank of America Securities.

Electricity supplier Eskom’s struggle to avoid blackouts and to manage its crippling debt combine with a list of economic and government challenges that will test the desire of money managers taking advantage of South Africa’s undervalued bond and equity markets, analysts from the bank said in Johannesburg Thursday.

“We are tactically bullish bonds and equities in the first quarter, and then unfortunately the longer-term realities such as the local structural rigidities, skills and labor, Eskom load shedding, lack of consumer and business confidence ultimately leads to the rally petering out,” said Michael Jacks, head of South Africa research for BofA.

BofA sees Africa’s most-industrialised economy expanding just 0.8% this year, an even more pessimistic projection than the central bank’s 1.2% forecast. They also foresee the government dragging its feet in making changes needed to spur the economy, with a lack of clear policy direction set to hurt sentiment among consumers, businesses and investors.

“Investors are getting impatient and are looking for opportunities elsewhere,” said John Morris, BofA’s ‎South Africa investment strategist. “They want to see reform, but are saying ‘why invest waiting for reform?’ when they can see reform and then invest.”

South Africa’s benchmark index was 0.4% lower as of 9:19 a.m. Friday. Eskom said it will cut 2,000 megawatts from the national grid starting 9 a.m. until 6 a.m. Monday.

Here are more views from the BofA analysts and strategists on the outlook for South African assets:


  • Investors may need two to three months to assess the outbreak’s impact on the global economy, Morris said.
  • “What you need to see is that there is a slowdown in the virus numbers to show that it is being contained.”
  • “It may be a month or two before investors get dragged back into risk assets.”

SA stocks outlook

  • A BofA survey of South African fund managers, presented Thursday, shows that bonds are their preferred investment, along with tobacco, healthcare and bank stocks. Real estate, life insurance and gold are their least-preferred stock sectors.
    • “It remains a stock picker’s market, with investors favoring quality stocks, which is companies with strong balance sheets, coherent strategies and idiosyncratic growth strategies,” Jacks said. He cited Capitec Bank Holdings Ltd., some industrials and Transaction Capital Ltd. as examples of this.
  • NOTE: Bonds Are Emerging Markets’ January Winners as Virus Hits Stocks
  • While bank stocks remain important to money managers, they are turning less positive about their outlook relative to retailers.
    • “Banks outperformed retail last year because their earnings were better, they were more resilient — there was no drastic drop in earnings,” Morris said.
    • With central-bank rate cuts of 25 basis points possible in May and December, sentiment may turn more in favor of the retail sector than banks.
  • In retail, BofA favors Spar Group Ltd., Foschini Group Ltd, Pick & Pay Stores Ltd., Mr Price Group Ltd., and Massmart Holdings Ltd.
  • In telcos sector, see pressure to lower data prices. Fund managers are cautious about these companies and see valuations as elevated.
  • Healthcare sector’s regulatory risks from proposed National Health Insurance are further in the future than the phone companies.

Palladium rally

  • BofA retains a buy rating on all the platinum group metal stocks.
  • “We expect palladium prices to peak at $3,500 an ounce, and rhodium to peak at $12,000 an ounce,” Jacks said.
  • The palladium rally is being driven by a structural deficit, with stricter emission regulations coming into play in China and in the European Union. Globally, there is a stronger focus on environmental issues at play, and supply isn’t keeping up with demand.


© 2020 Bloomberg L.P.
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