Banking shares are likely to be buoyed in the weeks ahead as declining interest rates boost demand for loans and lower the risk of default, fund managers said. Investors remain divided on the outlook for consumer shares.
"We see rates continuing to decline; that will be favourable to banks," said Peter Linley, investment head of unit trusts at Old Mutual Asset Managers. The unit trusts oversee about R10 billion. "Their earnings growth is still likely to do better than the average industrial company over the next 12 months."
Last week, Absa, Standard Bank, First National Bank, and Nedcor - South Africa's four biggest banks by assets - lowered their prime lending rates after three weeks of daily declines in the central bank's benchmark rate. All four banks said they would lower their prime rates to 23,5 percent from 24,5 percent tomorrow.
The Johannesburg banking index gained more than 5 percent last week, with Nedcor, the country's second biggest bank by market value, gaining over 7 percent. Nedcor last week said fiscal 1998 income rose a higher than expected 28 percent, strengthened by an increase in activity of its investment banking unit.
BOE, the country's sixth biggest bank by market value, climbed more than 27 percent last week. "BOE still offers good value," Linley said.
Investors' opinions vary about how much declining rates will benefit consumer shares.
The cut in prime rates is "probably going to encourage consumer demand - a lot of pressure will be lifted from struggling corporations and individuals", said Nick Downing, a fund manager at Appleton Group, which oversees about R1,6 billion.
Consumer shares which Appleton favours include Wooltru, Pick 'n Pay, Metro Cash and Carry and Shoprite Holdings, Downing said. Wooltru, which retails and wholesales food, textiles and other goods, has risen for 10 consecutive days, gaining more than 32 percent since October 23.
The Johannesburg stores index gained more than 3 percent last week, as Shoprite Holdings, the food retailer and distributor rose more than 18 percent.
Meanwhile, Edgars, the country's biggest clothing retailer, shed more than 6 percent last week. It said first-half income collapsed a greater than expected 81 percent as high interest rates and rising unemployment dragged down sales and increased costs.
"The environment for the consumer is going to remain tough for quite a while still," Linley said. "I'm not convinced we're moving into a substantial upswing in the movement of consumer shares in general."
Last week, the Johannesburg all share index rose over 3 percent, following a gain of about 14 percent in October.
"We think the local market has quite a long way to go, and it will maintain its positive bias for the next month or so," Downing said. - Bloomberg, Johannesburg