South Africa’s Record-Busting Stocks Set for More Gains in 2022

(Bloomberg) -- As it closes in on its best year since 2012, South Africa’s benchmark stock index is set for more gains on the back of a weakening rand, attractive valuations and supportive monetary policy.

The FTSE/JSE Africa All Share Index has posted multiple record highs as it climbed almost 20% this year, compared with a 7% retreat for the MSCI Emerging Market Index, as of Tuesday morning. In dollar terms, the Johannesburg gauge is up more than 10%, led by the travel and leisure sector and telecommunications companies.

With inflation still within the central bank’s target range, investors are betting policy makers won’t raise rates aggressively as they continue to support a fragile economy emerging from the pandemic. Accommodative policy together with a weaker rand -- which boosts index heavyweights with foreign-currency earnings -- may help sustain index gains, even as the Federal Reserve cuts back stimulus.

“We have a positive outlook for South African equities in 2022, expecting double-digit returns,” said Jonathan Kennedy-Good, a Johannesburg-based analyst at JPMorgan Chase & Co. “Above-trend GDP growth and still low  -- albeit gently rising -- rates in South Africa should help equity returns. A weaker rand should boost off-shore earnings over domestics.”

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JPMorgan favors the chemicals sector, where fuel-from-coal producer Sasol Ltd. is seen benefiting from higher oil prices, despite coal production issues, as well as platinum-group miners, with the metals expected to gain on rising demand from carmakers. It’s also overweight telecoms, with MTN Group Ltd. expected to benefit from a growing fintech business in Africa as well as increasing demand for data, according to strategist David Aserkoff.

Even after this year’s gains, valuations on the FTSE/JSE Africa All Share Index remain well below those of emerging-market peers. That presents buying opportunities for Allan Gray, South Africa’s largest privately owned money manager.

“The number one factor we think is always valuation,” said Tim Acker, a Cape Town-based portfolio manager at Allan Gray. “We are actually finding quite a lot of attractive opportunities, which makes us optimistic about the prospect for future returns.”

Acker favors companies with foreign earnings such as luxury retailer Richemont, and holding companies like Remgro Ltd., which invests in listed South African firms and trades at a discount to its asset value.

Hannes van den Berg, co-head of South African equity and multi-asset investments at Ninety One, sees the resources sector as the big beneficiary of global economic growth, while domestic industrials and retailers may get a boost from South Africa’s recovery. Continued gains, however, could come with more volatility, he said.

“Next year, also expect more volatility because of the interest rate hiking cycle globally,” Van den Berg said. “So don’t expect the same kind of records and returns as we’ve seen over the last 18 months.”

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