Traders Bet on a Rally in South Africa’s Underperforming Stocks
Traders Bet on a Rally in South Africa’s Underperforming Stocks
The worst may be over for South African stocks.
While the country’s equity benchmark has trailed the broader emerging-market gauge this year, rising less than half in dollar terms, analysts and traders have begun betting on a quicker rally in the coming months. Earnings estimates are rising faster in South Africa than for developing-nation peers, and short sellers have all but extinguished their bearish bets against the nation’s stocks.
Historically low valuations and rising earnings forecasts signal the country’s equities are ripe for a recovery, according to Morgan Stanley, which upgraded South Africa to overweight in March, and stuck with that call even as the fiscal outlook deteriorated and economic growth remained stubbornly slow. The impetus may come from China, which buys about a third of South Africa’s exports.
“Structural risks are intensifying, but we don’t see now as the time to reduce exposure,” Morgan Stanley analysts Marina Zavolock, Regiane Yamanari and Katie Crawley wrote in a report. “Should U.S.-China trade relations improve, South Africa is most exposed in eastern Europe, the Middle East and Africa.”
Short sellers appear to agree. They have reduced bearish bets against the U.S.-listed iShares MSCI South Africa Exchange-Traded Fund to near zero, the lowest level in nine years. This measure was almost 30% of the fund just two years ago, when Jacob Zuma was still clinging on as South Africa’s president.
While South African stocks have underperformed the emerging-market equity benchmark this year, analysts are betting the opposite may happen in the next 12 months. Even as they have lowered the average earnings estimate for the MSCI emerging-market gauge by 6.1% in dollar terms, they have raised it for the FTSE/JSE Africa All Share Index by 5.6%, data compiled by Bloomberg show. In local-currency terms, the increase is even more impressive, at 8.1%.
That’s made South African stocks more attractive. Equities in Johannesburg trade near the lowest valuation in a decade relative to global stocks.
--With assistance from Filipe Pacheco.
To contact the reporters on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net;Robert Brand in Cape Town at rbrand9@bloomberg.net
To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, ;Dana El Baltaji at delbaltaji@bloomberg.net, John Viljoen
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