Waning optimism over the outlook for the global economic recovery and questions over the government'...
Waning optimism over the outlook for the global economic recovery and questions over the government's race agenda are weakening the South African resources sector.
The sector had done well in late 2001 on expectation of global monetary easing boosting the economy and demand for South Africa's commodity exports.
A 25% fall in the value of the rand in December further aided the competitiveness of the country's mining exports on a global basis.
But investors have grown impatient for a broader recovery, and a proposal by the South African government to transfer control of mining assets to black empowerment groups has cast doubt over the future viability of the industry. A charter document on black economic empowerment in mining leaked from the minerals and energy department last month proposes that black-owned business should control all new mining projects within 10 years.
In addition, up to 30% of equity in existing operations must be made available to black-owned businesses before licenses to mine expansion-related projects are issued. Although the proposals may be watered down or even dismissed before becoming law, fund managers say the issue could seriously affect investment in South Africa.
Aberdeen Asset Management emerging markets manager Joanne Irvine says the proposal is seen as a move towards re-nationalisation, which would damage sentiment towards investment in the country.
'I think it could affect sentiment generally and the currency in the longer-term,' she adds.
Irvine, who manages Aberdeen's £56m Frontier Markets fund, says she is underweight South African resources but was considering a buy before the prospect of government intervention cropped up.
'It's had a good run already and now it's been knocked back on these concerns and worries over the outlook for a global recovery,' she says. 'If this hadn't happened, I would probably be thinking about picking up some stocks but I won't buy them until we get a handle on what the full implications are and how serious the government is about doing this.'
Political risk has seen Aberdeen run significantly underweight on South Africa in the long term, despite the cyclical attraction of its resources stocks.
'We've seen a high degree of political stability in recent years but there's always the underlying concern that what happened in Zimbabwe could spill over into South Africa,' adds Irvine.
South Africa also struggles to attract direct foreign investment due to a shortage of skilled labour, high rates of illiteracy, poverty and crime.
Credit Suisse emerging market portfolio manager Neil Gregson believes domestic-focused stocks, including financials, are currently offering better returns than the resources sector.
'The domestic economy is showing modest growth and the retail sector is strong,' he says. 'Resource company valuations are starting to get stretched.'
However, analysts from Schroder Salomon Smith Barney argue South Africa's resources sector is likely to outperform financials on a one-year view, citing rising momentum in global leading economic indicators that should boost global commodity demand and prices in the coming year.
Rand weakness continues.
Retail and finance stocks offer value.
South African equity yields are high.
Waning optimism over global recovery.
Government may re-nationalise mining.
Resources look overpriced.
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