Old Mutual backs South African stocks ahead of elections

Old Mutual believes that South African stocks are beginning to show their value, and some green shoots are apparent in certain sectors, particularly local banks and clothing retailers. 

Head of equities research at Old Mutual Investment Group (OMIG), Meryl Pick, said the asset manager is not building their portfolios around the potential outcomes of the national election in May. 

“We do not seek to position our portfolios around the May 2024 elections given that the outcome is so uncertain,” Pick said. 

“Instead, we favour a diversified approach that includes some exposure to gold as well as defensive rand-hedge shares like British American Tobacco and Anheuser-Busch InBev.”

Pick said the move back towards South African stocks is not a complete shift but a gradual increase in exposure to local companies depending on where OMIG finds the best value. 

“We have been incrementally tilting our portfolio back to SA Inc. as we anticipate a better year ahead, primarily due to the reduced level of load-shedding being factored into our projections,” she said.

“This should mitigate some of the commodity inflation pressures in areas such as food, oil, and energy. As a result, conditions are improving slightly for consumers and potentially enhancing growth prospects.”

More specifically, the tilt towards local stocks includes a rise in exposure to domestic banks and clothing retailers, driven by the belief that the country has reached peak interest rates and load-shedding will ease. 

OMIG is upbeat about prospects for domestic construction companies, too. 

Pick explained the construction sector had been hollowed out by a decade of low infrastructure spend, leaving the likes of Raubex and WBHO as the only players with balance sheets strong enough for big projects. 

Old Mutual expects increased state infrastructure spending and additional private sector spending on renewables, which is good news for the sector.

“Regardless of the economic backdrop, there are always returns to be had in the South Africa Inc. space,” Pick added.

“To succeed, equity fund managers must seek out companies that will deliver regardless of the macroeconomic or political backdrop.”

She explained that Old Mutual does this by focusing on innovative companies that are growing their market share and are potential buy-out targets.

Old Mutual’s tilting back towards South African stocks does not mean the asset manager is not looking for global opportunities and is not turning away from developed markets. 

Pick said geographic and asset class diversification are the best defence against the economic and political uncertainties surrounding South Africa’s May national election. 

Pre-election analysis and opinion have been narrowly focused on whether the ANC will see its national support fall below the important 50% mark and, if so, by how much.

Polling data from various sources points to ANC support falling below this level, with some indicating its support may drop below 50%. 

“However, national election results can surprise depending on a range of variables, including the turnout on election day and the veracity of campaigning,” Pick said. 

The base case seems to be that the ANC will fall just below the critical 50% support level and partner with a like-minded small party to remain in power. 

“Considering these numerous scenarios and unknown variables, diversification is indeed our strongest defence against such uncertainty,” Pick concludes.