Fund managers remain bullish on SA Inc

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JIMMY MOYAHA: We move on now to the latest South African Fund Manager Survey that was released today. The data suggests that fund managers are still patiently bullish on equities. I’m joined on the line by John Morris to take a look at the developments around this and try to unpack what it means for the South African picture. Good evening, John. Thanks so much for taking the time. Let’s start with the key takeaways from the survey.

JOHN MORRIS: Sure, thanks very much. It’s similar to last month in that the managers are bullish equities, and they are also more bearish on cash this month. On bonds, they are steady bond bulls.

And so from these responses, the fact that no manager wants to raise cash shows that there is an appetite for equities.

Managers see value in equities; they see more buyers in the market than sellers, and so they have a positive outlook.

The return is around 15% on a 12-month view from equities.

JIMMY MOYAHA: John, if we look at a 12-month view, we obviously can’t make certain assumptions knowing that there are still some data that will come out from the likes of central banks around the world and probably statistics organisations in each country. What is the outlook for the next 12 months from a fund manager perspective?

JOHN MORRIS: On a 12-month view, a higher net 53% expect the economy to get a little stronger. That jumped up from a net 38% last month. In fact this response is actually the highest response in the last 26 months. So I think for this year the outlook seems better than last year’s.

And then, coupled with that, of course, there’s a cutting cycle which lies ahead, and 87% of managers expect the first repo cut in the third quarter of this year.

We expect a cut in July, and we expect the Fed to possibly cut in June. Maybe the risks are that it could be delayed, but we are going for June, and we’ve got three cuts from the Fed.

So then the Sarb [South African Reserve Bank] would be able to cut from July in South Africa, and we are looking for the repo [rate] at 8.25%; the managers are looking for 7.5% in 12 months, which ties in pretty much with what we would expect this time next year at the repo-rate level.

JIMMY MOYAHA: John, you flagged something around the risks. Obviously we know that while the market is pricing in a lot of these cuts from Q3 and from the end of Q2, we know that there’s no definitive confirmation that we’re going to get those cuts at that time.

From a fund manager perspective, what are fund managers flagging as risks perhaps in the market – and more specifically the domestic risks that persist in South Africa? Are fund managers still concerned around things related to logistics and electricity and all of that? What are the domestic risks?

JOHN MORRIS: I would say just on the global survey, the number one risk is inflation, and then geopolitics – that’s in the global survey.

If you come down to the South African survey, there are two joint risks that received the same amount of votes. Number one is weak EPS [earnings per share]; the managers are looking for about a 4% EPS growth this year. So it’s a subdued earnings environment. As you know, the macro environment is tough, but joined with that have been policy shifts to the left.

So I think as we near the election, investors are getting concerned about possible outcomes, and that raises the level of uncertainty.

But, having said that, if you look at when it was unclear who would succeed Jacob Zuma, uncertainty was very high. Then over 60% of the managers said policy shifts to the left were the biggest risk then. Now [the number is] close to 30%. So it’s half of that. But it has been rising over the last few months in the survey. So it’s those two risks.

Transnet, Eskom – those were risks last year, but they seem to have faded somewhat. Perhaps managers are familiar with those risks. So the risks have slightly changed in this survey.

JIMMY MOYAHA: John, do the managers locally or even at a global level have a standpoint on the Magnificent Seven [Apple, Google parent Alphabet, Amazon, Facebook owner Meta, Microsoft, Nvidia and Tesla] as things stand? We’ve seen for the longest time, especially [since] the start of this year, that those seven stocks have been key in terms of the returns achieved by US markets. Are fund managers still assessing upside for the Magnificent Seven, or are we starting to see a bit of an overweight assessment of those stocks?

JOHN MORRIS: If you look at the large-cap managers in the US, they have an overweight position in those stocks. It’s a big component of the S&P 500. And if you look at flows, a lot of flows are still going to tech. In the global survey tech is still in focus, and so it’s still clearly important in the investment process. There’s no doubt about that.

I suppose managers are trying to work out [if it could become] more of a bubble. I think in the global survey, they asked if there is a bubble in AI; 45% said no and 40% said yes. So it’s pretty split. But it could be going more into a bubble as time moves on.

But I think investors are also looking at the S&P outside tech, outside the Magnificent Seven, looking at the valuations and looking at the earnings growth rates.

In the South African survey, it filters through to the category ‘software’, which is Naspers/Prosus. And there, managers – if you look at the preferred sector on 12 months – software comes second after banks. So banks is your favourite sector on 12 months. Software is coming second.

And then if you look at positioning, the positioning has been that more managers have been moving overweight. In fact it’s close to all-time highs.

So I think that’s a reflection of what’s happening globally [compared] to what’s happening locally, and I think managers still expect a lot more upside from Naspers and Prosus.

JIMMY MOYAHA: John, do you think the overweight towards – or expectations around – the software sector have anything to do with the current AI trends we’re seeing?

JOHN MORRIS: I think you have to look at each individual stock to see what the prospects are. But tech – the internet, AI – certainly has an impact on South African software, but of course you’ve got the China elements, you’ve got Tencent.

Investors have been very nervous of China for various reasons. So if look at the global survey, the position in China, that underweight has been increasing over many months, although in this recent survey it became less underweight. So there’s maybe a marginal improvement on the outlook towards China.

But the internet – I think the key is really on semiconductors more than the internet. It just depends, I think, on the stock. But AI puts the focus on tech. Tech is still in demand.

China could play catch-up market-wise at some point, and then that could be beneficial for the software sector in South Africa.

JIMMY MOYAHA: Speaking of South Africa, John, as we close our conversation, how are South African managers looking at the offshore allocations? We know that their allocation threshold has been increased to 45% and I think when I last checked a lot of the managers were sitting probably around the 40% range in terms of offshore allocations. Is this still something that local managers are pursuing from a diversification point of view? Owing to the South African growth story that seemed to be lagging?

JOHN MORRIS: Yes, I think diversification is critical. I think with the managers, if you look at the numbers, it might range from 25% to 45%.

I don’t think everyone is at 45%. Some managers have domestic mandates. The PIC [Public Investment Corporation] doesn’t have a big offshore component, but yes, it is a very big pension fund. So a sort of average is 35%, if I look at our fund survey. It’s an average. It’s not market-cap weighted, it’s just an average of the managers we survey. That comes in at 33%, 34%, so I think 35% is the right sort of number on average.

And then managers say they still want to invest abroad, but they’re actually looking more at domestic stocks at the moment because they see better upside for domestics.

If you could get through the elections, there’s no significant change in policies. We then have, say, a weaker dollar, higher commodity prices. The rand goes firmer. You could have a rerate of our market. You could get some good returns in South Africa. That’s why 73% say they see more; 80% say they see buyers in the market.

So the appetite to invest abroad has actually calmed down.

But yes, long term, managers want to raise that offshore component, and in the survey they say they would like to put another 9% of local assets abroad.

So we could go towards that 40% mark, but it takes time. They’ll go when the rand is firm, but not when the rand is weak.

JIMMY MOYAHA: Well, we’ll have to hope and pray that the rand does firm up at some point when the interest rates start to come down.

We’ll leave it at that. John, thanks so much for those insights. That was John Morris, who is South African strategist at Merrill Lynch South Africa, joining me to reflect on the Bank of America’s latest Fund Manager Survey.