Real yields put real pressure on expected returns

Growth, monetary and fiscal policy

Growth is set to remain weak. The Monetary Policy Committee (MPC) paused its rate hiking cycle, although the latest surge in oil prices, combined with a weaker rand exchange rate, prevented the SARB from becoming dovish. The post-Covid period of strong tax revenue overshoots has proven to be fleeting and SA’s fiscus is expected to deteriorate.

Fixed income and the currency

We prefer nominal bonds over cash and ILBs. Although we believe nominal bonds remain attractive, we avoid maturities beyond the R2035. For ILBs, we expect further bear steepness in the ILB curve. For the currency, the US rates market may still cause emerging market (EM) currency weakness into the next Federal Open Market Committee (FOMC) meeting on 1 November. However, we also believe it is too late to turn too bearish on the rand. Plenty is priced in already.

Listed property

The sector currently trades on an earnings yield of 11,0% and a forward dividend yield of 8,8%. This has decreased from 11,9% and 9,9% in 3Q23, respectively. We believe there is downside risk to earnings as higher funding costs filter through.

SA retail and industrials

We are becoming more constructive on the SA retail and industrials sectors, with a small overweight on SA apparel, Neutral on SA food and Overweight on SA industrials.

SA food producers

The SA food producer sector has come under pressure over the past five years due to factors that are both cyclical and structural. While most of the factors have played out, we believe we are now reaching the trough of lower earnings across the sector.

Precious metals

The gold sector faces several operational challenges, which could weigh on its operational performance and margins, and we continue to rate the sector Neutral. In the PGM sector, we do not expect a material re-rating in equities and do not see the index trending back to the long-term range anytime soon.

Diversified miners

For the most part, our commodity price forecasts have remained unchanged from 2024E to 2027E. We maintain our Overweight stock recommendation for ARM and South32.

SA telecommunications and media

While load shedding remains a constant headwind for SA mobile network operators (MNOs), the shift of capex to power resilience is bearing fruit, with improving top-line growth for these MNOs.

Healthcare – corporate activity-driven price rallies

The fundamentals that drive the sector remain intact, with a few stocks offering decent entry positions at current levels. We are Neutral the healthcare sector.

Gain full access to this report by signing up to the Nedbank Research Hub