JPMorgan to BofA see scope for longer South African stock rally

South African stocks have made their best start to the year since 2012, even after last-week’s pull-back, and JPMorgan Chase & Co. and Bank of America are among those predicting further gains.

A global appetite for riskier assets has propelled emerging market inflows and the Johannesburg exchange is set to benefit from its heavy weighting in mining stocks as China’s economy emerges from the pandemic. Add to this a global tech rally driving gains in index giant Naspers, plus the lowest local benchmark lending rates on record and the stage is set for the rally to continue.

“A historical low interest rate environment in South Africa and unprecedented levels of monetary and fiscal policy stimulus globally should be a supportive underpin for local equity markets, despite the pullback we have seen the past week,” John Storey, head of South African equity research at JPMorgan, said January 29 in an emailed response to questions.

The main Johannesburg index gained 5.2% in January, setting eight record closing highs in the process and stretching its recovery from the pandemic-induced March 2020 low to 65%. BofA estimated on Jan. 18 that the FTSE/JSE Africa All Share Index could test the 70 000 level this year, suggesting potential upside of about 12%.

Even after their strong start to the year, South African stocks still offer enticing valuations: they trade at the biggest discount to developing market shares since 2005 when Bloomberg started tracking the data. “Our equities are among the cheapest in the emerging market universe at a time when emerging markets are already very cheap relative to developed markets,” Shaun le Roux at PSG Asset Management in Cape Town, said in a note to clients.

Johannesburg-based money manager Anchor Capital is another of those forecasting a strong year for South African stocks, estimating on January 22 that further gains in the benchmark index may reach 11%.

Most of this year’s advance is down to four companies well-placed to ride a rebound in Chinese growth: Naspers, which benefits from burgeoning demand for online services in Asia’s top economy through its stake in Tencent, diversified mining giants BHP and Anglo American, who supply the world’s largest consumer of commodities, and Richemont, which benefits from Chinese shoppers’ purchases of luxury goods.

The quartet has contributed about 80% of the gains in 2021 in terms of index points, with Naspers alone responsible for 44%, as of the close on January 26.

Upbeat forecasts for the global economy suggest that “at least we should be expecting strong commodity prices and commodity stocks,” said David Aserkoff, a London-based JPMorgan equity strategist.

To be sure, the pace of the gains may slow, as last week’s 2.4% retreat suggests. Record-breaking inflows, such as those into emerging market funds, are typically signs that markets are peaking, Aserkoff said. Globally, equity holdings in long-term investor portfolios are now slightly above the post great financial crisis average, indicating the rally is maturing, he said. And the volatile retail-trader speculation in the US could be another sign of stock markets overheating.

President Cyril Ramaphosa’s State of the Nation Address on February 11 and the budget 13 days later will be immediate signposts on how the government is thinking about reallocating resources and managing the growing fiscal deficit, a concern for investors, JPMorgan’s Storey said. Any advancement around policy reform, especially energy, could dramatically improve expectations, he said.

“Against this, we wouldn’t underestimate the importance of the successful roll-out and implementation of the Covid-19 vaccine, as South Africa doesn’t want to get left behind as other markets and economies, hopefully, start to return to normal,” Storey said.