Shifting Investor Sentiment Towards South African Equities

Shifting Investor Sentiment Towards South African Equities
Recent insights from Bank of America (BofA) illustrate a notable change in the sentiment of South African investors. The new findings suggest that a reduced number of fund managers are optimistic about equities, coupled with a decline in the perception that stocks are undervalued. The forecast for the All-Share index has been adjusted to 93,000, down from an earlier estimate of 99,000. Additionally, the report anticipates total returns for equities at 16%, with projections for R2035 government bonds at 12% and cash at 8% over the following year.
Current Equity Bull Trends
BofA’s report reveals a staggering shift, indicating that only 56% of fund managers now identify as equity bulls, a substantial drop from the previous 72%. Additionally, the report shows that a modest 33% are cash bears, which still supports expectations for double-digit returns in equity markets. It's noteworthy that the sentiment around undervalued stocks has also plummeted, with only 28% of managers expressing this view compared to a remarkable 79% prior to elections. In contrast, the outlook for bonds shows 39% of participants retaining positive sentiments.
Fund Manager Preferences and Market Dynamics
The sentiment analysis also reveals an evolving preference among fund managers. The intense inclination towards domestic equities appears to be softening, with increasing interest in the apparel sector. The yield forecast, measured over ten years, has shifted upward by 39 basis points, leading to anticipatory themes surrounding potential repo rate cuts in the subsequent 12 months. An impressive 83% of surveyed managers foresee a minor strengthening in the economy, alongside a net 39% forecasting an uptick in inflation rates.
Currency and Bond Yield Forecasts
BofA's projections concerning currency and bond yields indicate that the USD/ZAR exchange rate is expected to stabilize around 17.77. Additionally, forecasts stand at 7.18% for repo yields and 10.22% for R2035 bonds. Several fund managers expressed intentions to sell R2035 government bonds if yields rise to around 9.53%. There is a prevailing belief among managers that the South African Reserve Bank (SARB) will choose to reduce interest rates, with 83% anticipating cuts in the first quarter and the remainder in the second quarter of the fiscal year.
Current Positioning of Fund Managers
The current positioning of fund managers presents valuable insights, indicating relatively high positioning historically in equities, bonds, retailers, food producers, gold, and software sectors, while showcasing lower allocations in offshore investments, cash, telecommunications, chemicals, and healthcare. There has been an uptick in resources positioning alongside a decline in financial sectors.
Sector Preferences and Projections
Projections for the next 12 months indicate an increase in the net percentage of managers favoring equities; it has risen to 67%. Conversely, those favoring bonds have dwindled to 17%, and there has been a growth in managers who are underweight in cash, climbing to 22%. Looking ahead, the sectors displaying the most promise include apparel retailers, banks, and software development, whereas the least promising sectors comprise telecommunications, chemicals, and life insurance. Notably, the gold sector has experienced the most substantial gains, while banks and life insurance sectors seem to be waning. General industrials and transport sectors have gained favor, surpassing food retail, with banks and apparel retailers observing historic highs.
Frequently Asked Questions
What does the BofA report indicate about equity bulls?
The report shows that equity bulls among fund managers have decreased from 72% to 56%.
How have projections for the All-Share index changed?
The All-Share index's projection has been revised downward to 93,000 from 99,000.
Which sectors are predicted to outperform?
Apparel retailers, banks, and software sectors are predicted to outperform in the coming year.
What are the expectations around repo rate cuts?
Many managers anticipate the SARB will implement repo rate cuts within the next 12 months.
How has manager sentiment changed regarding undervalued stocks?
Sentiment regarding undervalued stocks has significantly dropped, now only 28% believe stocks are undervalued.
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