LONDON Feb 29 Growing global bullishness
may erode South African stocks' perceived safe haven status,
which helped them outperform many emerging markets last year
despite infrastructure bottlenecks, political risk and rand
The shift is already evident in returns with shares in South
Africa's BRIC peers all romping higher, faster than the 7
percent gained by the former this year.
South Africa's stocks kept their value in 2011 in local
currency terms, while fellow members of the political BRICS
grouping -- Brazil, Russia, India and China in addition to South
Africa -- all fell around 20 percent. Developed market stocks
lost nearly 8 percent in dollar terms.
Still, south Africa's broader all-share index hit
record highs last month and is trading within one percent of
those levels, while the more closely-watched Top 40 index index
reached three-year highs.
But, analysts say, many of these gains are due to last
year's relatively strong performance.
Investors have attributed South Africa's defensive appeal to
its insulation from major markets and its healthy financial
system, which have sheltered it from the euro zone debt crisis.
The country's core gold mining sector has also gained from
heavy safe-haven buying of gold since the 2008 crisis erupted.
But now investors worldwide have clearly switched into
risk-on mode, hailing stronger U.S. economic data, quantitative
easing by the Federal Reserve and the European Central Bank and
a second bail-out for indebted euro zone member Greece.
Meanwhile locally, African National Congress leadership
elections later this year are seen likely to encourage
government spending in South Africa, rather than reform.
"We are underweight South Africa and have been for a while.
Recently we have become a little bit more negative," said
Maarten-Jan Bakkum, emerging markets strategist at ING
"Political risk is increasing, the growth numbers are very
Morgan Stanley this month downgraded South African stocks to
"equal weight" from overweight, and cut the country's 2012
growth forecast for the country to 2.5 percent. South African
finance minister Pravin Gordhan cut the official forecast to 2.7
percent at the country's budget speech last week.
John Lomax, head of emerging equities at HSBC, is also
cautious, even as tensions with Iran take some of the shine off
riskier emerging markets.
"We have been quite positive on emerging markets all year,
we have been underweight South Africa," he said.
"Looking ahead, it's hard to be as positive, but we still
see further upside for emerging markets, but we expect South
Africa to lag."
South Africa is regarded as a "low beta" -- low volatility
-- emerging stock market, even though the rand is
volatile -- falling 12.5 percent last year -- because of its
well-run financial institutions and exposure through the stock
index to sectors such as gold.
"If you remove the volatility of the rand from the
investment, it would probably be a high-rated market," said
Oliver Bell, Middle East and Africa fund manager at T Rowe
Despite the rally of the past year, valuations are not out
of kilter with global emerging markets -- at a forward
price/earnings ratio of 11, compared with 10 for global emerging
markets, according to Lomax.
The rand is also stronger this year, gaining over 8 percent.
But there is little opportunity for more upside.
"The year we had last year, South Africa proved to be
defensive and outperformed, now markets are running the other
way, it's defensive and has lagged," said Jeff Chowdhry, global
head of emerging equities at F&C.
Chowdhry said he was underweight South Africa last year, so
had not benefited from the upside, but was remaining
One area where fund managers do see some attraction in South
Africa is through its exposure to other African markets, such as
Many African exchanges are not liquid and do not have a
strong representation of stocks such as retail, so investors
prefer to look at South African companies with an African reach.
It is the same approach which drives investors to buy U.S.
or European-listed stocks with emerging market exposure.
"Africa may be a small part of their revenue, turnover now,
these companies are going to move fast," said Bell.
One example is retailer Shoprite, which said last
week it saw scope for 700 stores in Nigeria.
But the hardier investor with African experience is likely
to see yet more opportunities in local sectors, such as
Nigerian-listed banks, after South Africa had such a strong year
Malcolm Gray, who runs a pan-Africa fund at South African
fund manager Investec with around 50-60 percent invested in
South Africa, said valuations in Nigerian banks were looking
In South Africa, meanwhile, Gray said:
"We find it quite hard to find a lot of value at the
(Graphic by Scott Barber; editing by Ron Askew)