EDITORIAL: Right now, it’s sensible to be bearish on cash
The latest survey of local fund managers by Bank of America Securities certainly gives a mixed picture. Bank of America Securities is better known in SA as as Merrill Lynch, its name before the corporate dealing that emerged from the debris of the global financial crisis.
The survey revealed that the proportion of investors bearish on cash was the highest since 2003, when the global economy was rebounding from a recession. This might be seen as a positive signal that the people whose job it is to allocate savings are seeing enough of an improvement to put that money to work.
On the other hand, this could just be a reflection of monetary easing by the Reserve Bank, which pushed the repo rate to its lowest level in about half a century. The lack of returns from cash are pushing yield-seeking investors towards government bonds, not withstanding the dire fiscal position, as well as commodities and equities.
While the JSE has recovered from the worst of the 2020 sell-off to be relatively flat for the year, this has been concentrated in commodities and in Naspers and its international technology unit, Prosus.
For the unloved shares, such as banks that are down about 40% for the year, there may well be light at the end of the tunnel. There’s much debate about whether they have set aside enough provisions for bad debts as the worst of the retrenchments in the economy may still be coming.
Investors who are looking at these and wondering if they've reached the bottom might be encouraged by the finding that “no manager is concerned about banks”. And the finding that about 80% will see average equity returns of about 30% in the next 12 months, probably in “lagged domestics this time”, will encourage many a bull.
A word of caution: while 79% see more buying than selling opportunities in the equity market, this is still lower than the 88% recorded in 2003. “In 2003, 100% of managers said the equity market was undervalued; a net 21% this month.”
Before the Federal Reserve’s annual Jackson Hole, Wyoming, conference, held virtually this year, much speculation was about whether the chair, Jerome Powell, would deliver a profound change in the central bank’s approach to interest rates. What was being discussed before the event would not be revolutionary for SA: the idea of chasing an average so that policymakers can tolerate inflation running above 2% for a while.
But what was not in doubt was that lower for longer — some say forever — as policy wasn’t going to change anytime soon. That means there’s unlikely to be international pressure on SA rates to rise substantially. Local inflation may have ticked up from the lows seen during the depths of the Covid-19 crisis, but it’s still expected to remain subdued, closer to the lower rather than the upper end of the Reserve Bank’s target range.
In this scenario, it is entirely sensible for investors to be bearish on cash. Bond yields on the other hand, are still elevated and will probably remain so as market concern about the country’s finances mounts. Even after the inflation rate climbed by a full percentage point in July, SA still had one of the highest real bond returns of major emerging-market economies.
If “no manager is concerned about banks”, it becomes hard to argue against a Nedbank that has lost half its value this year, despite the well flagged concern about its property loans. Furniture retailer Lewis, which lost about 60%, signalled confidence this week that the sell-off in its shares had gone too far by announcing its intention to buy back 10% of its own shares.
Economic data early in September will probably show an economy that shrank about 50% in the second quarter, according to Investec and BNP Paribas. That doesn’t seem to make the SA market a “screaming buy” either.
SA’s well-paid fund managers have a great opportunity to show they are worth their keep. The index doesn’t tell even half the story. Their clients will have a hard time picking the winners.
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