World’s most valuable bank backs South African stocks to soar

South African stocks are poised to extend their rally in the second half, buoyed by an improving outlook for the domestic economy and supportive monetary policy, according to JPMorgan Chase & Co.

The FTSE/JSE Africa All Share Index is up about 23% this year in dollar terms, outperforming both the MSCI Emerging Markets Index and the S&P 500.

JPMorgan expects the momentum to continue, led by South Africa Inc. shares as they stand to benefit from local economic tailwinds.

“Strong precious-metal prices coupled with lower oil prices are positively impacting South Africa’s terms of trade, boosting the rand and providing a supportive backdrop for domestic equities,” JPMorgan analysts Inga Galeni and David Aserkoff wrote in a note.

A proposal to lower the South African Reserve Bank’s inflation target is promising for local-asset returns, they added.

JPMorgan is the latest Wall Street bank to back South African equities. Goldman Sachs said last week that the country’s financial and cyclical stocks are set to outperform emerging-market peers as the Federal Reserve’s easing creates room for its South African counterpart to cut interest rates.

The lenders are bullish even as a fresh crisis engulfed President Cyril Ramaphosa’s administration. Rival parties have called for a probe after a senior police official accused one of Ramaphosa’s ministers of interference in an investigation into political assassinations.

While the political backdrop remains fluid, JPMorgan said the passage of the national budget helped ease investor concerns about the stability of the governing coalition.

Lawmakers backed a revised budget framework last month after a delay sparked by a dispute over taxes and spending.

“The passage of the budget has marked peak uncertainty, diminishing the risks of a coalition collapse,” Galeni and Aserkoff wrote.

“The increasing credibility of the reform agenda, which focuses on building institutional capacity and broadening market structure, is expected to drive long-term growth and improve investor sentiment.”

JPMorgan added Mr Price to its top picks, noting the retailer’s year-to-date underperformance. Overweight names include lenders Capitec and FirstRand, as well as miners Impala Platinum and AngloGold Ashanti. Health insurer Discovery and mobile phone provider MTN are also favoured.

So-called rand-hedge stocks — which protect against a decline in the South African currency due to their foreign earnings or offshore listings — are losing appeal as the dollar’s weakening trend boosts emerging-market currencies.

“We see diminishing benefit in maintaining rand hedges in our portfolio in a world where the FX backdrop is becoming incredibly supportive to South African equities,” the analysts said.