Ahead of the pack

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za

Lo­cal bank­ing shares, which have largely seen months of steep down­side, ex­tend­ing the long­est los­ing streak since April 2011, may soon get out of the woods. The de­cline in share prices – over the past year, FirstRand has been the best per­former, with a de­cline of 17.5% – has been driven by a weaker rand against the dol­lar, fears of a credit rat­ing down­grade to junk, and ex­pec­ta­tions that the US Fed­eral Re­serve will con­tinue to in­crease in­ter­est rates. For­eign in­vestors in par­tic­u­lar were spooked.

But with the rand re­cov­er­ing from his­tor­i­cal lows in Jan­uary, bank­ing stocks are re­bound­ing – po­ten­tially even break­ing out of their medium-term bear trends. For many in­vestors, the drop in share prices has made bank­ing shares more at­trac­tive at cur­rent lev­els. Div­i­dend yields have been boosted, which means cash div­i­dend re­turns will most likely be good.

How­ever, con­cerns re­main over the out­look for banks. With the Re­serve Bank rais­ing in­ter­est rates, a slug­gish econ­omy and higher food in­fla­tion in par­tic­u­lar, banks’ non-per­form­ing loans may in­crease as con­sumers bat­tle to make ends meet.

On the up­side, South African banks are well­reg­u­lated and com­ply with strong cap­i­tal-ad­e­quacy ra­tios. They also rely pri­mar­ily on do­mes­tic cap­i­tal mar­kets to fund their bal­ance sheets, un­like many lenders in other emerg­ing mar­kets that tend to bor­row in dol­lars, and there­fore have to ser­vice their debt with weaker lo­cal cur­ren­cies. How to trade it: Cur­rently con­sol­i­dat­ing out of its medium-term bear trend, a move above 4 930c/share would end the side­ways mo­men­tum – pos­si­bly trig­ger­ing fur­ther gains to­wards the 6 195c/share tar­geted level in the short term. Above 5 240c/share po­si­tions can be in­creased and again at 5 800c/share. A tight stop-loss is rec­om­mended. Oth­er­wise, down­side be­low 4 500c/share would negate our bullish call.

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