Staying the course despite the political economy

Asset allocation – our base case still favours bonds:

Unchanged from December and March, nominal bonds remain our preferred asset class in South Africa (SA) despite the selling pressure experienced in May. In fact, our view on all the major asset classes remains largely unchanged since the start of the year.

Growth – the decline in growth is slower than anticipated:

While growth in the US and the Eurozone will likely continue to slow this year, the decline would be less than we expected at first, despite China’s reopening (recovery) disappointing. That said, we still do not expect negative yoy growth for SA in 2023.

Rand – we prefer to be bullish rather than bearish at 20,00:

We have been rand bears since May last year as the weaker growth cycle and asset price deflation played out. However, should the rand move towards the 19,50-20,00 range again, as before, we would prefer to hold a bullish bias.

Fixed income – despite a tough 2Q, local bonds remain attractive:

Government bonds as an asset class remain attractive, in our view. We favour nominal bonds over ILBs. Within nominal bonds, we believe the most value lies in the 2032-37 area.

Listed property – higher interest rates impacting earnings:

Key operational metrics for the sector continue to improve, albeit off a low base despite macro challenges facing the sector. Vacancy rates have remained stable and, in some cases, even improved, with escalation rates underpinning top-line growth.

SA retail and industrials:

Our cautious view on the SA retail space is still predicated on rising interest rates (Nedbank est. another 25-basis-point hike in the repo rate in July 2023). Slower GDP growth remains impacted by load shedding and a constrained consumer.

Precious metals:

We expect a rebound in PGM prices in the second half of the year, which should also boost the equity performance over the short term. Longer term, we are still calling for a correction in the PGM basket price back to more normalised levels. We remain sellers of gold equities.

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. We like ARM’s diversified commodity exposure. South32 has an enviable commodity diversification and exposure to future-facing metals.

SA telecommunications and media:

SA telecommunications networks have focused much of their capex and opex spending on combatting the impacts of load shedding, which is negatively affecting earnings through lower network availability, increased battery maintenance/security costs (due to theft/vandalism) and increased diesel costs for running generators.

Healthcare – corporate activity-driven price rallies:

Healthcare names have seen significant price rallies over the past six months, driven by value-unlocking corporate activity. In our view, healthcare names are fairly valued, with few offering decent entry opportunities at the current price levels. We are overall Neutral on the healthcare sector. 

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