Fund managers are predicting a post-election rally in local equities, according to a recent survey conducted by the Bank of America (BofA). Despite rising political risks, the consensus among fund managers is optimistic, with a preference for domestic stocks over international investments.
The BofA survey, conducted between 3 and 9 May, included 19 fund managers who collectively manage significant assets within South Africa. The survey found that 74% of the respondents expect a rally in domestic equities following the general election on 29 May. This is four percentage points higher than the finding of the April survey.
Managers’ optimism is based on the view that South African equities and bonds are undervalued, with 79% of the surveyed managers highlighting this point.
Their preference has shifted towards domestic stocks and non-resource rand hedges. According to the survey, a net 68% would overweight domestic stocks, although there is still some hesitation regarding interest rate-sensitive sectors.
BofA’s report indicated that positioning is currently rising in the heavy industrials and consumer sectors. Fund managers are particularly interested in sectors such as banks, software, mining and metals, and food producers. This interest is driven by the expectation of double-digit equity returns over the next 12 months.
Despite the positive sentiment towards domestic equities, there is a notable intention to diversify investments. On average, fund managers plan to allocate an additional 6% of their assets offshore. International investments are currently at an average of 35%.
Biggest risks to domestic equities
Political uncertainty remains a significant concern among the surveyed fund managers. The potential for a leftward shift in policy after the election is seen as the main threat to domestic equities, followed by weak earnings and persistent inflation.
A dysfunctional Eskom and Transnet have slipped down the list of risks – they are on par with consumer weakness but are perceived as less of a risk to local equities than rand volatility.
Only 11% of the managers surveyed anticipate an acceleration in policy reforms following the election. This pessimism towards reform is compounded by a long-term rising debt profile, which poses a threat to fiscal stability. This probably explains why only 5% of the managers surveyed were outright bond bulls.
Outlook for the economy and inflation
The economic outlook remains cautiously optimistic, with only 53% of respondents predicting that the economy will become “a little stronger” over the next year. The rand is expected to trade at around R18.01 in a year, indicating modest confidence in the currency’s stability.
Inflation is expected to moderate slightly this year, but fund managers have adjusted their expectations for interest rate cuts. The anticipated easing cycle is now projected to start in the final quarter of 2024, rather than the third quarter as previously expected. This shift reflects the ongoing uncertainties in the economic environment and the cautious approach taken by the South African Reserve Bank.
