Old Mutual Sees Too Much Bad News Priced Into S. African Stocks

South Africa’s weak economy and poor growth prospects have hidden the “phenomenal” potential for the shares in some locally focused companies to deliver returns for investors, according to Old Mutual Investment Group.

So-called South Africa Inc. stocks have largely missed out on the 40% rebound in Johannesburg’s benchmark index from its March lows, an underperformance that is “not sustainable,” Meryl Pick, who helps oversee OMIG’s 10 billion rand ($533 million) Investors Fund, said during a webinar Wednesday.

“There are resilient and adaptive companies that can still outperform in a weak macro,” Pick said, citing stock-specific areas of the local market that the money manager sees as attractive.

Old Mutual Sees Too Much Bad News Priced Into S. African Stocks

Pick pointed to South African bank valuations as an example, with lenders trading at the same price-to-book multiples they had in the 1980s, even though their businesses are much stronger with more robust balance sheets.

Here are more of Pick’s views on “South Africa Inc.” stocks:

  • Aspen Pharmacare Holdings Ltd.’s deal with Johnson & Johnson to manufacture the U.S. company’s Covid-19 vaccine will allow the health care firm to generate volumes at its manufacturing facilities.
  • Construction companies Raubex Group Ltd. and Stefanutti Stocks Holdings Ltd. are also favored, given their strong balance sheets, cost-cutting measures, and are poised to benefit from government infrastructure spending.
  • MTN Group Ltd. and Vodacom Group Ltd. have benefited from work-from-home and have cut their costs in response to a low-growth environment.
Old Mutual Sees Too Much Bad News Priced Into S. African Stocks
  • Italtile Ltd. is poised to benefit from relatively low penetration in South African market.
  • Hospital operators are priced as if the current low occupancies and slow rate of elective surgery will continue indefinitely, but volumes will return. “We have seen that in the U.S., we will see that in South Africa.”
  • Among retailers, Massmart Holdings Ltd. remains “exciting,” given its rationalization and reorganization.
    • Foschini Group Ltd.’s acquisition of Jet has given the fashion retailer additional local manufacturing capacity and a new platform.
    • Shoprite Holdings Ltd.’s online shopping business and restructuring of its portfolio has positioned it to emerge from the pandemic stronger than it entered it.
    • Retailers should also benefit from favorable lease terms with landlords in the wake of the virus

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