(Bloomberg) -- BlackRock Inc., the world’s biggest asset manager, sees the recent rally in South African assets as a tactical opportunity, though talk of economic reforms need to be translated into concrete measures for those gains to continue.
The classification of South Africa, which has benefited from the formation of a business-friendly coalition at the end of June, compares with the “conviction” view the company has on other emerging markets such as India and Mexico, based on its views on long-term growth and sustained money flows.
“Our South Africa view toward positive is still more on the tactical side right now, seeing the developments this year,” Karim Chedid, head of EMEA investment strategy at BlackRock, said in an interview at Bloomberg’s Johannesburg office on Wednesday. “We’ll see how things progress.”
Since the elections on May 29, South Africa’s equity benchmark has gained 15%. The rand has strengthened 4.6% against the dollar, and the yield on government 10-year bonds has dropped 141 basis points.
The broad rally followed more than a decade of stagnation in Africa’s biggest economy, largely attributed to corruption under the rule of former president Jacob Zuma and the associated deterioration of energy and transport infrastructure.
While President Cyril Ramaphosa, who assumed office in February 2018, had begun pushing forward with economic reforms, against the wishes of some in his party, they are now expected to gather pace after the African National Congress lost its majority for the first time.
Gross domestic product expanded by an average of less than 1% over the past decade — lower than what’s needed to cut a 33.5% unemployment rate. Continued reform momentum could mean the economy may expand at a rate of 3% to 5% by 2030, according to Business for South Africa, a body that’s helping the state to coordinate its efforts to kick start the economy.
“We have seen a pick-up in foreign investor flows into South Africa in the second half of the year,” Chedid said. “It’s coming from a very under-owned starting point. Global investors have been underweight and they’re closing those underweights at least back to benchmark if not going further into overweight territory.”
Chedid said South African stocks have been trading at a significant discount to the global emerging market benchmark and their recovery is partially being driven by that.
South African bonds, along with other emerging market debt, are unlikely to rally as significantly as stocks because of the relatively high interest rates that continue to prevail in safer developed markets, he said.
“The stock rally is broad and not sector-specific,” he said. “We do think the rally can hold, it has legs. We’re seeing flows come back to the benchmark and as we see more on the pace of the economic reforms, we could start to see investment.”
Still, the central bank’s interest-rate cutting cycle, as with other markets, is likely to be “shallow,” he said, limiting stimulus from the monetary side. The South African Reserve Bank reduced its benchmark rate by 25 basis points in September to 8%, and money markets are pricing another 75 basis points of cuts over the next 12 months - which is “in line” with BlackRock’s view, Chedid said.
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--With assistance from Prinesha Naidoo, Robert Brand, Khuleko Siwele and Mpho Hlakudi.
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