Money Manager Upbeat on Growth in Ramaphosa's South Africa

(Bloomberg) -- South Africa’s economy is under new management, and Investec’s Chris Freund is among equities investors who are expecting growth to surprise to the upside.

President Cyril Ramaphosa, in office since February, is spurring optimism among stock traders who are already noting changes in Africa’s most industrialized market. The new leader has set a goal of attracting $100 billion in investment, overhauled his cabinet and installed new boards at troubled state-owned companies.

“People are going to be surprised how South African growth rates are revised upwards,” Freund, the Cape Town-based South African multi-asset head for Investec Asset Management Ltd., which oversees about $140 billion for clients globally, said in an interview. “We are bulls on South Africa’s economy.”

Freund is not alone. Morgan Stanley upgraded South African equities to overweight on Wednesday and said its forecasts for economic growth are above consensus for this year and next. Business confidence is recovering and political risk has fallen since Ramaphosa replaced Jacob Zuma as president, with private investment and household consumption heading higher. On top of that, valuations are attractive: stocks traded on the Johannesburg exchange are at their cheapest since February 2010 on a price-to-earnings basis, Morgan Stanley said.

The improving confidence and economic outlook are conditions Freund is looking to make the most of for the 23 billion-rand ($1.8 billion) Discovery Invest Balanced Fund, the flagship mutual fund he helps manage for Discovery Invest, a division of Discovery Ltd., owner of South Africa’s largest medical-insurance administrator.

“We think that equity markets around the world are mildly expensive, but the more important thing is that the growth cycle is still with us, and so it’s time to try and make clients money,” Freund said.

South African stocks make up 45 percent of the Balanced Fund, with Naspers Ltd. its biggest holding at 3.5 percent. The fund has returned 7.7 percent in the past year, better than the 5 percent achieved by its peers, data compiled by Bloomberg show.

Here are Freund’s views on some key factors influencing South African equities:

Naspers:

• While the share has dropped 14 percent this year, “Naspers we’re always going to like. We think Tencent is an astonishingly good company,” he said, referring to its 31.2 percent stake in Tencent Holdings Ltd.
• Naspers’ sale of part of its Tencent stake in March was a missed opportunity to buy back shares and reduce the discount it trades at to Tencent, Freund said

Mining Industry Regulations:

• “Our sense is that there’s a lot more pragmatism around it and that the final version will be a pragmatic approach, which recognizes the need for transformation, but at the same time tries to balance time frames and business realities”
  Read more here on Ramaphosa’s steps so far and the challenges that remain

Impact of Steinhoff International Holdings NV:

• “There’s no doubt that corporate governance has a much higher importance now than it did a year ago, essentially because people have had a very vivid example of how much damage bad corporate governance can do”
• Investec already had a large ESG (environmental, social and governance) team, “but we have brought them even more in the center of our decision making”

--With assistance from Lisa Pham Rene Vollgraaff and Vernon Wessels

To contact the reporter on this story: Thembisile Dzonzi in Johannesburg at tdzonzi@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, John Viljoen, Paul Jarvis

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