A recent survey of institutional fund managers in SA by Bank of America found that most of the local fund managers who participated in the survey believe that SA equities are undervalued and that holding excess cash in a portfolio is not a good idea at the moment.

Research firm Ipsos conducts the survey on behalf of Bank of America Merrill Lynch SA every month. The results of the survey ending 23 November were telling, in that 71% of fund managers indicated that they believe the JSE will be higher than current levels six months out. This is a remarkable change from only three months ago, when only 55% of the experts said they see the local share market improving. 

Now, 86% of the fund managers indicate that they prefer to be overweight in local equities, given the prospects over the next 12 months.

Bank of America states in its research note that the latest report represents the 26th anniversary of the SA fund manager survey. “A big thank you to all the participants for your commitment, contribution and insights since 1997. You have made ‘market consensuses’ possible,” it says.

The latest survey was conducted between 3 and 9 November 2023. The raw survey data is shared with all the participants as soon as the survey is done so they can analyse changes in sentiment.

Bullish on equities

John Morris, a strategist at Bank of America Merrill Lynch SA, says the value of the survey is that there is a good correlation between what fund managers expect in terms of returns over the next year and the actual returns 12 months out, based on more than two decades of data.

“That 71% of fund managers are bullish on SA equities is a bullish signal for the local market. The 71% is one of the highest I have seen,” says Morris.
It can go higher, he adds, noting that it reached 100% after the global financial crisis in 2008.

This was after equity markets around the world crashed in the wake of the sub-prime meltdown in the US. That crisis bankrupted some of the world’s leading banks, and the Dow Jones fell by 50% over 18 months. Obviously, fund managers realised then that shares offered value.

“The survey shows that SA fund managers are overwhelmingly bullish on local equities. It is a positive sign for returns over the next 12 months,” says Morris.

The Bank of America survey found that a net of 86% of fund managers would prefer to be overweight in domestic equity and underweight in foreign equities and bonds at the moment. Only a month ago, less than 40% of the fund managers who participated in the survey preferred local equities to their international counterparts.

Morris says this is not surprising. “Domestic assets are undervalued and the rand is weak. Fund managers are not going to sell local equities at these levels and buy foreign equities with a weak rand,” he says, adding that share prices will be supported in the absence of selling by institutional investors.

Findings

Other highlights of the report are:

Fund managers are expecting the JSE All Share Index to increase to around 82 000 a year from now;
SA equities are expected to offer returns of around 17% over the next 12 months – none of the respondents expect returns of less than 5%, 21% expect more than 10%, 57% expect more than 15%, and one fund manager predicts a return of at least 25%;
The respondents predict that the 2032 bond will offer a total return of 18% and cash to yield 9%;
Net equity bulls among respondents rose to 57%, compared to 22% only a month ago;
Respondents support equity returns 12 months out;
Fewer respondents are commodity bears, despite recent media reports lamenting lower commodity prices and the slowing growth of the Chinese economy;
A net 57% of respondents say the bond market is undervalued;
A net 86% of fund managers would prefer to be overweight domestic equities; and
A net 29% want to invest offshore at the current state of the market with an investment horizon of 12 months, compared to 56% of fund managers during the previous survey in October.
Fund managers are also expecting the rand to strengthen somewhat from recent levels.

The report calculates the net percentage in each question as the difference between the number of fund managers who feel bullish or positive about a variable minus those who feel bearish or negative.

Morris says the expectation of a return of around 17% from the local market is very positive. “You are not going to get that from the S&P 500.” 
He adds: “US markets, excluding the ‘Magnificent Seven’, did not fare well recently. We expect the S&P to return 4.5% per annum over the next 10 years, based on PE [price-earnings ratio] and earnings growth.”

The Magnificent Seven shares – a term coined by one of his colleagues, Michael Hartnett – refers to Apple, Microsoft, Amazon, Alphabet, Meta, Tesla and Nvidia.

Economy

The survey also asked fund managers about their expectations for the SA economy.

Most expect the rand to firm from current levels and that the SA Reserve Bank will start to cut interest rates from the second quarter of 2024. A net 21% expect the economy to get “a little stronger” over the next 12 months.

A net 64% of respondents to the survey see inflation slightly lower 12 months out.

There was also a remarkable swing in sentiment regarding consumer spending. 

In the October survey, 55% of fund managers believed we had “yet to see the worst impact” of economic difficulties on consumer spending. In November, only 29% were this pessimistic.

However, the fund managers we trust to look after our savings are also worried about how things are going in SA, and most are of the opinion that the prospects of government reforms to boost the economy are fading. They voted that SA has a “major problem” regarding poor skills, wage rigidity, government intervention and delivery failures, state-owned enterprises and municipalities, and failing logistics, electricity and water systems.

Not surprisingly, Eskom and Transnet were mentioned as the biggest problems affecting the SA economy. The prospect of government policy shifting to the left and lacklustre growth in company earnings were the next biggest concerns.

However, Morris says the overall sentiment remains positive towards local shares. He says healthcare, banks and financial services, retailers and tobacco shares were flagged as the favourites.