Financial shares are likely to post earnings growth in the months ahead, even as the shrinking economy dampens prospects for company earnings, said fund managers.
"The financial sector will still show growth in earnings," said Tim May, head of portfolio management of the private client division of Standard Equities.
"The provision for bad debts has probably been sufficient. They'll still continue to provide for high bad debts."
The financial index shed almost 11 percent last week, and the Johannesburg bank index lost more than 12 percent, on concern that last week's cuts in local interest rates would not be enough to boost loan growth and lower the level of bad debts.
"Banks are the way to go" with falling interest rates, said Ben Kodisang, a portfolio manager at Prodigy Asset Management, which oversees about R1,8 billion. Kodisang favours "big banks" such as Nedcor, the country's fourth-biggest bank by assets. "I'm very nervous about small or niche banks."
Liberty Life, the country's largest insurer by market value, last week said it would distribute subsidiaries' holdings worth about R8,6 billion to shareholders as it attempts to focus on financial services.
"Liberty might show a lot more potential in the next 12 months because of indications it will unbundle," said Colin Greff, chief executive officer of financial services company Greenwich Group.
Even so, last week's interest rate cuts did little to boost prospects for an economy which contracted at an annualised rate of 2,3 percent in the third quarter, said analysts.
South Africa's benchmark securities repurchase rate dropped more than 20 basis points last Wednesday, prompting the country's four biggest banks to cut their prime lending rates to 23 percent from 23,5 percent.
"The rates cuts are so small and our interest rates are so high, it's still a long way to go before it helps our economy," said May. "Companies' profits are going to remain largely under pressure."
High interest rates mean consumers are likely to have less disposable income and will not be able to borrow as cheaply. The Johannesburg stores index declined more than 10 percent last week.
"A lot of the (retailing) companies are going to struggle to show improved profits, or even maintain profits," said May. "It's a sector still to stay clear of for now."
Kodisang said although he would "stay away from clothing (companies) at the moment", he favours food retailers such as Shoprite. "It focuses on the bottom end of the market. It's very defensive by nature."
Fund managers also said information technology companies are likely to show earnings growth.
May favours Comparex Holdings and Dimension Data Holdings - the country's two biggest information technology companies by market value - and DataTec. "They're all expanding overseas," said May.
Security companies are also likely to post continuing growth, said May, who favours shares such as Paramed Holdings and Klipton.
"People are continuing to do the best they can to protect the public against crime," he said. - Bloomberg