South Africa is poised to attract more investor interest as the depressed economy appears to have tr...
South Africa is poised to attract more investor interest as the depressed economy appears to have troughed and valuations are becoming more attractive.
Any progress in the market will depend on the recent events in Zimbabwe not spilling southwards.
The MSCI South African index was down 21.5% in dollar terms from 1 January to 8 May. This underperformed the broader MSCI Emerging Markets Index, which was down by 8.3% over the same period.
Richard Rothwell, emerging markets fund manager at Deutsche Asset Management, agrees the depressed economy may have troughed. Mortgage loans have bottomed out and are showing signs of growth, while vehicle sales are picking up. He says other positives for the region are strong commodity prices boosted by the weak rand and relatively low levels of imports.
The stable inflation of 8% means there could be further cuts in interest rates, which are currently 14.5%, down from a peak of 25.5% in August 1998.
One threat to the interest rate cycle is the weak currency, which in turn could lead to interest rates increases.
Rothwell says the market now offers value opportunities and particularly in commodities. At a stock level, he likes Sappi, a paper exporter and the oil company Sasol. He says the weak rand and strong commodity prices are benefiting both businesses.
At the political level, a major concern is unrest in Zimbabwe.
Rothwell says: "We are concerned about the events in Zimbabwe in case the crisis spreads into South Africa. However, we are not forecasting the worst case scenario. The market wants a more aggressive statement from Thabo Mbeki on where he stands in relation to Robert Mugabe and his ruling Zanu-PF party."
Martin Currie, which has just launched a Dublin-based Sicav to invest in South and sub-Saharan Africa, is particularly positive on the market, saying South Africa is at the start of a sustained economic upswing.
Chris Butler, emerging markets fund manager at Martin Currie, says South Africa is one of the few markets where there are expectations of falling interest rates and accelerating economic momentum. He expects a re-rating of the market from 11 times to 15 times price earnings, combined with 27% earnings growth, providing a return of more than 70%.
He says: "We see bond yields falling from 14% to 11% over 12 months with inflation down to 6%. Meanwhile, we expect the rand to stabilise and even appreciate. For the first time we are confident on South Africa."
Butler expects to add most value in the African Opportunities fund by identifying companies achieving high returns, but which have yet to attract the attention of most international investors. Softline and MGX are examples of high growth, under-researched companies which the group expects will gain a much wider audience.
Although the Deutsche emerging markets portfolio does not currently have significant investment in the rest of Africa, Rothwell is watching Egypt and Morocco closely, with the possibility that the MSCI could include them in its Global Emerging Markets index.
Rothwell adds: "One of the risks with Egypt is that it could depreciate its currency because it has high volumes of export trade with Europe, where the euro has depreciated."
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