SA fund managers shift focus to local equities while wary of economic challenges

Tawanda Karombo

South African fund managers emerged this month as overweight on local equities, with banks and apparel retailers the most preferred stocks while real estate, healthcare, and telecoms topped the rankings among the disliked ones.

Despite the wider preference for local equities, the South African fund managers are worried about subdued corporate earnings per share, noted Bank of America (BofA) Research in its July SA Fund Manager Survey released on Monday.

The survey revealed a net 53% of managers overweight on equities and 20% underweight on cash, showing that “they want to buy” equities.

“Preferred sectors are banks, apparel retail, software and diversified industrials. Disliked: real estate, healthcare, telecoms… food producers, tobacco and life insurance (defensives) gain ground,” said the report.

Nonetheless, for the second month, the fund managers exhibited a preference over the rand hedges amid concerns over “policy shifts to the left” and “a weaker earnings backdrop”.

There was an overall high positioning relative to history in equities, gold, life insurance, bonds and platinum. This comes against the backdrop of a resurgence in the price of platinum group metals and gold prices remaining elevated on global markets.

The SA fund managers this month had a low positioning in healthcare, telecom, cash and offshore.

According to the survey, the biggest gains in positioning were in “life insurance, equities and personal goods” while food producers were also among the biggest fallers, alongside software and general.

In the 12 month outlook, 33% of surveyed fund managers see the South African equity market as undervalued, with a slightly higher net at 67% seeing more 'Buy' than 'Sell' opportunities.

In terms of current and future asset allocation, 73% prefer positioning in financials and industrials in the domestic equity portion of the portfolio.

“Managers added to industrial equities and sold bonds. They added to offshore equity and bonds. Offshore investments well off regulatory 45% limit at 35% (32%) but near highs,” noted the survey.

Regarding the economy, the 3% inflation target gained more weight among SA fund managers this month, with a net 33% expecting the South African economy “to get a little stronger” and 33% expecting inflation slightly higher.

The rand/USD exchange rate is seen averaging R1:$17.26  and 67% see a rate cut. The fund managers positioning on South African bonds had fewer of them overweight, showing that fewer managers want to buy bonds again.

“Managers' repo forecast over the next 12 months is 6.81%. The R2035 bond yield forecast falls to 9.50% (and) the 12-month rand forecast firms. Economic optimism slightly more positive. We need reform and growth, to put South African citizens first, and a weaker dollar (outside a global recession),” noted BofA report.

Last month, the SA Fund Manager Survey exhibited investors becoming overweight on platinum. This represented one of the biggest shifts as the fund managers positioning on platinum shifted from underweight to overweight.

This high positioning for platinum was at the time “relative to history in software, gold, retail and food producers and bonds.

It also came despite the World Platinum Investment Council saying full year output will still be 6% lower than last year “since South African producers will not benefit from the large drawdown of work-in-process inventory that occurred” last year.

Besides the inclination towards platinum, the South African fund managers have exhibited “low positioning” in healthcare, offshore, telecom and cash.

BUSINESS REPORT