South African stocks may have become too cheap for investors to ignore and Old Mutual Investment Group is among money managers seeing an increasing number of attractively valued shares.
The Johannesburg market has fallen to its least expensive levels in more than seven years, dragged lower by a faltering local economy grappling with a long list of challenges. Concerns that the coronavirus outbreak will hurt global growth have added to the woes early in 2020.
Evidence the government is serious about sparking growth, repairing battered business confidence and rehabilitating the creaking state power company would help spur buying, said Peter Brooke, head of Macro Solutions at OMIG, which manages about R663 billion in assets.
“The South African market five years ago was expensive, but there is more and more value appearing, and there are more and more companies that we see as attractive, and we would be looking to apply cash in those areas,” Cape Town-based Brooke said in an interview. Share-price declines have outpaced the drop in company earnings, resulting in higher dividend yields and relatively low price-earnings ratios.
Investor-friendly steps Brooke would like to see include streamlining the management and operation of state-owned companies.
The contents of Finance Minister Tito Mboweni’s budget next month could be key to a re-rating of South African stocks, depending on what he says about issues such as debt-crippled electricity supplier Eskom.
“It is very hard for companies to manufacture profits, so to get a proper turn around, we would need structural reform,” he said. “South Africa is cheap without the improving outlook. We can create that, but it will require political will.”
Among proposals Brooke said could help jump-start growth is one by Mineral Resources and Energy Minister Gwede Mantashe to set up an alternative to Eskom that makes use of greener technology. The utility has been described by Goldman Sachs Group Inc. as the biggest threat to South Africa’s economy because of its rolling blackouts and debt burden of about $30 billion.
“If we allow the private sector to deliver electricity, that means in the next 12 to 24 months, we will get more electricity into the grid and then we can grow a little bit,” Brooke said.
Here are more of Brooke’s views:
South African Bonds
Global bond market has grown more expensive as a result of the coronavirus, so it is hard to see return in that space. However, South African bonds offer exceptional value.Moody’s Investors Service may downgrade South Africa to sub-investment grade rating, which will create a buying opportunity.
“If I had to guess, I would say that they will downgrade us in 2020, just because we have not done enough in terms of reducing our debt to GDP. But obviously, we have the budget coming, and we have to see if Tito Mboweni manages to pull a rabbit out of the hat.”
“The interesting element is rather how sensitive South Africa is to what is happening in the rest of the world, because our own fundamentals are weak, so it is a leveraged effect of what is happening.”