Numerous South African fund managers say that local government bonds are undervalued, and over 70% say that local equities are cheap at current levels.
This is according to data from an asset manager survey by Bank of America surveys in South Africa.
94% of fund managers said government bonds are undervalued, the highest proportion in the last decade. Bank of America said that this indicates a significant appreciation of local assets may occur over the next year.
Fund managers further expect the rand to rebound to R17.50 in the next year.
There is still significant uncertainty regarding interest rates and inflation in South Africa, with 69% of fund managers expecting the Reserve Bank to hike interest rates again before the end of 2023.
This is despite 61% of them saying that monetary policy in South Africa is too restrictive.
However, local asset managers still think a recession will occur in 2023 as South Africa has “major problems”.
Respondents also doubt that the desired macroeconomic reforms will occur as the government struggles to implement its stated reform agenda since the end of the Covid pandemic.
Eskom is regarded as the largest risk to South Africa’s economic performance, although only 30% of fund managers considered the utility its primary concern.
This is the lowest level recorded since the beginning of 2023 and is down from a peak of 65% in March 2023.
Transnet is also a major worry for local asset managers, with deteriorating rail infrastructure hobbling the mining sector and negatively impacting the country’s balance of payments.
Asset managers estimate that the private sector will add 5,000MW and 6,000MW of additional electricity generation to the grid by 2025.
Despite these concerns, fund managers said they intend to reduce their cash holdings in favour of domestic equities, offshore assets, and local bonds.
None of the asset managers surveyed said they intend to sell their domestic equity holdings, with 61% indicating they want to be overweight domestic equities – the highest reading in 2023.
Healthcare, banks, and tobacco companies were the sectors most favoured by local asset managers, while gold and real estate were the least favoured.