Most of South Africa’s 15 largest asset managers expect better returns from local bonds and equities than their offshore counterparts.
This was revealed by Bank of America in its South Africa Fund Manager Survey for December, which focussed on asking local asset managers what they expect in 2024.
Many remain cautious regarding South African equities, with uncertainty surrounding the country’s national elections next year.
Thus, many continue to favour government bonds and other fixed-income instruments over equities in South Africa.
This is coupled with the very attractive yield of South African government bonds and an expected rally in their value once central banks worldwide begin to cut their interest rates.
The yield on local bonds is expected to stay higher for longer than their global counterparts, as the Reserve Bank is expected to delay cutting rates until later in the year due to local inflation risks.
The US Federal Reserve has signalled it might cut rates by a cumulative 75 basis points in 2024. The European Central Bank and Bank of England will likely follow suit and ease their respective monetary policies.
This will make South African bonds comparatively more attractive as their yields will continue to be greater than those in developed economies.
While asset managers reduced their bullish bets on South African equities, 40% still expect local equities to be the best-performing asset class in 2024.
Over two-thirds of respondents said the local equity market is still undervalued, particularly local banks and financial institutions.
The most significant risks flagged by the asset managers to South African equities are load-shedding, logistical bottlenecks and the possible shift to left-leaning policies following the election.
Risks around an election expected to be the most competitive since South Africa became a democracy in 1994 cloud the outlook for its stocks next year.
Surveys suggest the ruling ANC could lose its absolute majority for the first time since coming to power almost 30 years ago, potentially forcing it to find coalition partners.
“With unknown outcomes, there is a lot of uncertainty in the system,” Duncan Artus, chief investment officer at Allan Gray, told Bloomberg.
“This is weighing on investor sentiment and particularly foreign participation in South African markets.”
An election result that pushes the ANC into a coalition with the EFF, the third-largest party in the 2019 vote and a group that advocates for the nationalisation of banks, mines and land, “would spook the markets.”
Allan Gray’s Artus expects local investors to proceed cautiously, favouring fixed income over equities, until there is more certainty, he said.