With local election and global uncertainties, 2019 will be a difficult year, but banking stocks expected to firm up financials

Fay Mukaddam Picture: FINANCIAL MAIL
Fay Mukaddam Picture: FINANCIAL MAIL

The general financials index, which was one of the hardest hit in 2018, is showing slight recovery, but it remains to be seen if it will keep the momentum for the rest of 2019, especially with the looming general election.

The index lost 12.96% in 2018, slightly higher than the JSE which closed 11.37% lower than in 2017. Both recorded the biggest declines in a decade.

The general financials index is up 1.67% so far this year while the JSE has firmed up 3%.

Jean Pierre Vester, portfolio manager at Fairtree Capital, said he expected some movement on the index although he was not certain at this stage about the level of expected returns.

“The election could lead to more movement than usual, since movement is associated with a change in expectations, and there is a chance that the outcome of the election is quite different to what is expected,” said Verster.

Financial stocks are among the most sensitive at election time. When Cyril Ramaphosa was elected  president of the ANC in 2017, banks and other financial stocks hit record highs for most of December that year. Local banks also benefited the most when Ramaphosa replaced Jacob Zuma as president of SA in February 2018.

Harry Botha, an analyst at Avior Capital Markets, said while bank stocks might react to elections, he expected them to be resilient, especially in the second half of the year.

Graphic: RUBY-GAY MARTIN
Graphic: RUBY-GAY MARTIN

“On share price returns and total returns, banking stocks filled the top four places in 2018. I think SA banking stocks will react more to the economy than the elections in 2019. We expect growth to improve in the second half and into 2020, supporting bank share prices. I expect banks to deliver double-digit, mid-teens, returns in 2019,” said Botha.

The analysts pointed out that the biggest drags in the financial index in 2018 were holding property companies especially Resilient and NEPI as well as financial stocks like Coronation.

Banks and life insurers bucked the trend. The JSE Banks Index closed 4% down in 2018 but up was up 0.1% on a total return basis, when dividends, special dividends and other distributions to investors are included.

Karl Gevers, head of research at Benguela Global Fund Managers, pointed out that banks  performed significantly better than the rest over  five years.  What would boost bank stocks was their trading below the sector's recent historic mean price:earnings ratio of just more than 12x in the past eight years, he said.

“That’s not expensive at the current return on equity that they are generating. The problem for banks is the slow economic growth, as they are limited in their ability to grow their loan books without economic growth. But even with that, they are reasonably priced,” said Gevers.

The life insurance index, the most resilient in the financials index, is not likely to have a strong 2019 with all the risks investors were facing, said Gevers.

Life insurance stocks lost only 1.16% in 2018 and outperformed banks by more than  2% in 2018. The sector, just like banks, is up almost 3% so far in 2019 .

“We are however hoping for a stronger performance from the now unshackled Old Mutual. Hopefully, a rerating will follow. But this may take a bit longer than one year,” said Gevers.

As for the stocks that dragged the index, particularly property companies,  Gevers said it was unlikely to rebound.

buthelezil@businesslive.co.za