How stocks may fare under new government

SENTIMENT AMONG INVESTORS IS STRONG FOR THE MOMENT Since Ramaphosa’s election as ANC leader in December, the rand has risen 12% against the dollar – more than any other currency.

Equity investors reacted with euphoria to Jacob Zuma’s resignation as SA president, with stocks soaring the most in over three years. New President Cyril Ramaphosa is expected to pursue market-friendly policies.

Economic growth averaged just 1.6% a year. Since Ramaphosa’s election in December as ANC leader, the rand has risen 12% against the dollar, more than any other currency.

“SA-linked stocks are having a strong rally on the back of the stronger currency,” Sanlam Investment Management’s Patrice Rassou said. “That’s linked eventually to stronger consumer and business confidence in SA, which would translate to greater economic activity and higher economic growth.”

Sentiment among foreign investors is strong for the moment.

Here’s how SA stocks may fare under a Ramaphosa-led government:

Ramaphosa is likely to change the Cabinet and start implementing structural reforms, which would improve sentiment at ratings companies, says Rob Pietropaolo at Unum Capital. Financial stocks have “a hell of a lot of potential” should SA stick to a path of structural reforms. Johannesburg’s index of banking stocks jumped more than 7% to a record yesterday.

A stronger rand should keep inflation below the midpoint of the central bank’s target range and lead to the potential for two or three rate cuts, whereas six months ago rate increases were seen as likely, said Rassou. That’s a boost to consumer confidence and supportive of disposable income.

Shares of companies that are focused on the domestic economy, such as Bidvest Group and Remgro, rallied yesterday and are likely to continue to benefit from gains in the rand, said Pietropaolo.

Local plays in the mining sector, Anglo American and platinum stocks, will benefit from optimism that Ramaphosa will pursue an investor-friendly approach, said Rassou.

“When emerging markets are in favour, then commodities start to pop up their head and that will filter through to our miners,” said Pietropaolo. “So I do think this still has legs.” Companies that benefit from rand weakness may lose favour with investors if the rand continues to power ahead. “The pure rand hedges will come under pressure as the impacts of the stronger currency come through,” said Rassou. “Some of them will be able to offset that through some pricing power, hopefully playing in a strong global environment.”

Investors are likely to move money out of smaller companies to bet on larger stocks during the Ramaphosa rally, said Pietropaolo.

Property companies, which went offshore in search of better returns, are underperforming the more SA-based ones, said Rassou.

“Property is down, but that’s got nothing to do with the actual political events,” said Pietropaolo. “They have been out of favour for the last couple of weeks. I think if it wasn’t for the good news they’d have probably continued to get hit.” – Bloomberg