BofA sees South African stocks undervalued, expects rate cut in Q3

On Tuesday, BofA’s South Africa strategist provided insights into the financial market sentiment, revealing a bullish stance on the country’s equities. A significant 69% of managers surveyed believe equities are undervalued, a notable increase from 50% previously. This contrasts with a lower 38% who see bonds in the same light. Additionally, 88% of respondents see more buying opportunities than selling in the equity market.

The market is anticipating the national budget announcement on February 21, with 25% expecting it to disappoint. Concerns include the performance of State-Owned Enterprises (SOEs) and weaker earnings per share (EPS). Contrary to earlier predictions, the first interest rate cut is now expected in the third quarter of 2024, adjusted from the second quarter. This adjustment reflects a cautious approach to monetary policy.

Looking ahead 12 months, a higher number of managers, 38% compared to the previous 29%, anticipate the South African economy will strengthen slightly. There is also a strong consensus, with 75% of respondents, expecting a slight decrease in inflation rates. The USD to ZAR exchange rate forecast for the next year is set at 18.35, up from 17.73. The repo rate and the R2035 government bond yield are predicted to be at 7.50% and 10.77%, respectively, showing a slight increase from prior estimates.

Investor sentiment towards domestic equities is optimistic, with a high net 75% of managers willing to overweight domestic stocks over the next 12 months. This marks a shift in consumer confidence, as for the first time in six months, a net 31% of respondents believe the worst of the high interest rates and inflation impact on consumer spending is over. However, there remains a divide on the timing to invest in interest rate-sensitive assets, with 50% suggesting it is premature, likely due to expectations of a persistent high repo rate.

In terms of investment preferences, there is a growing interest in offshore assets, with 38% of managers looking to invest abroad. Local bonds and equities attracted 25% and 19% of investment interest, respectively. Offshore equity weight reached a survey high of 27%, indicating a strategy to diversify investments. The most favored sectors for the coming year include banks, food producers, healthcare, and retailers, while gold, chemicals, and telecoms are least preferred. Notably, previously out-of-favor sectors like telecom, gold, and real estate are starting to gain traction among investors.

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