Ahead of the pack
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.