SA stocks are cheap as investors shun the SA’s faltering economy

Nairobi — SA stocks look cheap right now, by one clear measure at least. And the evidence suggests they will stay that way.

Shares in SA are trading at the biggest discount to US stocks in more than a decade. The S&P 500 index has stormed ahead in 2019, rising 18%, with tech stocks powering the advance. That’s pushed price-earnings above their five-year averages and widened the gap over the SA benchmark to the widest since March 2009.

SA stocks have climbed 7.2% this year, edging ahead of their emerging-market peers, but that’s largely down to strength in global tech investor Naspers, gains in international luxury goods seller Richemont, and a rally in some miners and precious metals producers. For the rest, investors have largely shunned a market hobbled by a faltering economy and anaemic earnings prospects for its companies.

“The overall SA market has been rising, driven by the exceptional outperformance of Naspers, and from rallies in single commodity resources shares,” Adrian Cloete, a portfolio manager at PSG Wealth in Cape Town, said by phone. “But it has been a narrow rise, with only a few of the companies participating in the gains. The others, particularly the SA Inc stocks, have been left behind.”

The skewed performance has left SA price earnings ratios muted, with Johannesburg stocks trading at 12.5 times estimated earnings, below the five-year average of 14.6. Domestically focused companies are trying to eke out profits in an economy that contracted by the most in a decade in the first quarter, while unemployment is running at the highest rate in 11 years and fragile consumer confidence is recovering from the lowest levels since 2017.

“SA currently falls into the value-trap category because there is no earnings growth on the domestic stocks,” said Henre Herselman, a derivatives trader at Johannesburg-based Anchor Private Clients. “Stock prices will follow earnings and until that changes, my sense is that the metric will remain cheap.”

Little upside for SA stocks

Arqaam Capital strategists wrote this week that there is little upside for SA stocks until the bigger economic picture improves. Massive government bailouts of the embattled state power utility Eskom will increase the country’s fiscal deficit and makes the loss of SA’s last remaining investment-grade rating from Moody’s Investors Service more likely, they said in a note.

An October downgrade could provide entry opportunities for quality domestic stocks, boosting returns for general retailers by as much as 20%, and banks as much as 10%, if accompanied by risk-on sentiment and two rate cuts from the SA Reserve Bank, Bank of America Merrill Lynch strategists said in a note.

One potential silver lining for the Johannesburg market appeared lost this week, dashed by US Federal Reserve chair Jerome Powell. A series of interest-rate cuts in the US could have sent more dollars in search of yield in emerging markets such as SA. But the US Fed signaled on Wednesday that its first reduction in a decade may not be followed by many more.

Rather than driving inflows, investors have been moving in the opposite direction of late: foreigners were net sellers of SA stocks in eight successive sessions, as of Thursday. And that’s a small slice of a larger foreign retreat from the country’s markets this year, as outflows from stocks and bonds have just reached $5bn.

“As soon as people think things will improve, then investors, who are forward-looking, will start investing in shares that are driven by the local economy,” Cloete said. “At the moment, people are quite gloomy and this is reflected in the share prices. We need a change in sentiment.”

With Paul Wallace, Prinesha Naidoo and Srinivasan Sivabalan

Bloomberg