Bank and retail shares set to rise
• Economic outlook has improved and cyclicals will respond, say observers
South African stocks are trading at their cheapest levels since 2012, with retailers poised to follow banks higher and deliver share price outperformance this year, says Richard Schellbach, strategist at Citi.
South African stocks are trading at their cheapest levels since 2012, with retailers poised to follow banks higher and deliver share price outperformance this year, says Richard Schellbach, equity strategist at Citi.
Schellbach said cyclical sectors, such as banks and retailers, responded well to even minor positive adjustments in economic data.
Although weak, a pick-up in SA’s economic growth boded well for cyclical stocks, said John Orford, portfolio manager at Old Mutual Investment Group’s MacroSolutions.
A more stable economic outlook — driven by better global growth, a recovery in commodity prices and an improved domestic inflation outlook — would support asset classes sensitive to interest rates, such as bonds, property, retailers and banks, said Orford.
Old Mutual expected two 25 basis point interest rate cuts in the second half of 2017, followed by a third in 2018, said Johann Els, senior economist at Old Mutual Investment Group.
A significantly improved maize crop had driven grain prices 25% lower than a year ago, which would reduce food inflation, currently at 11.8%, to very low single digits, Els said.
Consumer price inflation would, in turn, fall below 5% by the middle of the year, giving the Reserve Bank more room to cut rates, he said.
“It’s important to guard against too much pessimism regarding the South African economy,” Els said, noting that headwinds such as the drought, low commodity prices and currency shocks had subsided.
In line with the Treasury, Old Mutual forecasts economic growth of 1.3% for 2017, quickening to 1.5%-1.8% in 2018.
“We’ve increased our allocation to local equities and added exposure to retailers and basic resources,” said Orford. “South African equities, which have stalled since 2015, are now trading at better valuations.”
Retailers were in a similar situation to where banks were 12 months ago, Schellbach said. “With banks having significantly outperformed retailers over this time, we see opportunity for some catch-up from retailers.”
Banks were “priced for recession” at the start of 2016, Schellbach said. Similarly, retail stocks had already priced in much of the bad news, he said.
That SA managed to avoid a recession in 2016 and dodged a sovereign credit ratings downgrade, while banks’ bad debts were relatively contained, sent bank shares soaring.
The banks index gained 27% over 2016, food and drug retailers climbed 5.24% and general retailers shed 11.02%.
Citi expects retail stocks, which are up year to date, to climb further. Valuation multiples were near five-year lows and earnings slumps were unlikely, given that the South African economy was on a better footing, said Schellbach.
Citi economists expected no rate moves from the Bank in 2017, but anticipated a 1% boost to real household consumption growth, he said. Relative to other emerging markets, SA looked better than it had for some time, Schellbach said.
Consumers would remain under pressure in the first half of 2017, facing higher effective tax rates and elevated inflation, Els said. A “confidence crisis” among businesses and consumers continued to weigh on economic growth, he said.