Investors are biding their time – with South Africa expected to turn a corner

Investors are expecting a rally following the South African national and provincial elections on 29 May 2024.

According to the latest Bank of America (BofA) Fund Manager Survey in April, a defensive sentiment amongst investors is currently prevailing.

However, a significant 70% anticipate a rally post the May 29 election.

Although managers anticipate policy shifts to the left, many foresee a rally in domestic stocks over the next 12 months.

For the next 12 months, banks, metals & mining and tech sectors will be the sectors favoured by managers.

Notably, the resources sector has resurged for the first time in six months, indicating positive sentiment.

However, there has been a shift away from consumer sectors due to concerns over interest rate cut delays in South Africa.

Only 69% of managers expect the first repo rate cut in Q3 2024 – a decrease from 87% in March.

The remaining 31% only expect rate cuts in Q4 2024 or, even worse, Q1 2025.

Hopes of another cut in South Africa have just been given another blow, with data from the USA highlighting the higher-for-longer narrative for investors.

The US GDP growth rate halved from 3.4% q-o-q in Q4 to 1.6% in Q1, below expectations of a mid-2% figure.

“While growth was lower than expected, the deflator (an inflation measure) was higher than anticipated and accelerated from 1.6% in Q4 to 3.1%. Worryingly, the core measure for Q1 rose from 2% to 3.7% – also higher than expected,” said the Bureau for Economic Research (BER)

“This data would fit with the higher-for-longer narrative we have seen dominating of late. In the end, the concerns about persistent price pressure won, and markets are now turning to just one rate cut, in the November Fed meeting of the year.”

The rand, and many other emerging market currencies, has been trading notably weaker due to the strength of the dollar.

Indonesia, another victim of the higher-for-longer narrative in the USA, has just seen its central bank hike interest rates as the rupiah weakened to a four-year low, with it needing to hike to strengthen the currency’s stability.

“(While it) would not be this explicit on exchange rates, (the SARB) would not hesitate to act should it start to worry about the second-round implications on the inflation outlook of a weaker rand,” said the BER/.

Stronger economy

Despite these concerns, respondents in the BofA survey said the rand should reach R18.06/$ over the next 12 months (March: R17.88/$) – an improvement from the current R19.01/$.

Moreover, a net 65% (March: 53%) of respondents expect the economy to strengthen slightly over the next 12 years.

Despite the fears over interest rates, a net 65 (March: 67%) still expect the core inflation to be slightly lower over the next year.

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