Top asset manager has a warning about South African retailers

Asset manager Stanlib said it is not enthusiastic about South African retail shares, despite ongoing reforms in the economy.

This is largely due to South Africa’s lacklustre GDP growth, with retailers’ performance highly tied to the local economy, and increased competition from international giants like Amazon and Shein.

Instead, when considering South African equities, Stanlib’s Multi-Asset team prefers local banks, saying they have ample room to run and are set to benefit from the country’s economic green shoots.

As part of a recent Asset Management Roadshow, Stanlib explained that it is bullish about South African equities and bonds in light of structural reforms in the local economy.

These reforms, which comprise improvements in government finances, inflation targeting, electricity, rail and ports, are expected to result in faster GDP growth.

The National Treasury revealed in the latest national Budget that it expects South Africa to achieve GDP growth of 1.6% in 2026, 1.8% in 2027, and 2% in 2028.

However, Stanlib said these structural reforms could see South Africa’s growth outpace the Treasury’s cautious forecasts, spelling good news for local equities and bonds. 

Stanlib is putting its money where its mouth is, with its Fixed Income and Multi-Asset teams deciding to overweight selected domestic bonds and equity.

However, not all local equities are made equal, with Stanlib’s Multi-Asset team preferring financials over retail.

“Within South African equities, the team is skewed towards financial shares,” the asset manager said. 

“South African banking shares have rallied, but earnings multiples remain attractive, profitability remains strong and relative to global comps, there is a valuation argument to be made.” 

In fact, Stanlib’s Multi-Asset team believes local banks present a better opportunity relative to South African bonds.

However, unlike some of its peers, this optimism does not extend to South African retail stocks.

Retailers under pressure

Stanlib explained that it is not enthusiastic about South African retail shares, despite some optimism surrounding these stocks. 

Many South African retailers are classified as ‘SA Inc’ shares, meaning they derive the vast majority of their income from the country.

These stocks stand in contrast to, for example, JSE-listed mining stocks, which often derive their income from operations outside South Africa, even though they are listed locally.

SA Inc stocks are, therefore, often considered bellwethers for the local economy, with the expectation that improvements in the economy will also see companies like retailers perform well.

Therefore, many believe recent economic improvements, like lower inflation and interest rates, will take the pressure off South African consumers’ wallets over the next year, benefiting local retailers.

In addition, Stanlib explained that there is a perception of value because retail companies’ valuations are low relative to their own history.

However, the asset manager pointed out that the South African economy is only growing at around 1.8%.

“With increased competition from the likes of Amazon and Shein, it is difficult to see how South African retailers will grow,” it said. 

“Our process isn’t highlighting this as a great opportunity for us to make a meaningful allocation. The team would put SA retailers into a bucket of Too Hard.”

During Stanlib’s recent roadshow, Stanlib’s Head of Multi-Asset, Marius Oberholzer, said banks are far better placed to benefit from reforms in the local economy.

“The SA Inc companies, for us, there’s a little bit too much noise around something like the retailers – despite interest rate cuts potentially coming, despite that confidence that I was talking about,” he said. 

“Versus looking at our financial companies relative to the compression of bond yields are nowhere near where they were trading in 2006, which is what our bonds are sort of indicating.”

“So we feel there’s quite a lot of value in our financial companies, banks more specifically.”

“The economic activity picking up, liquidity picking up – from our perspective, that’s the place where we really like to position ourselves, and we think as the story in South Africa improves, the macro investors will come for our equities and they’ll come for our banks.”