There are signs that the battered stocks of companies focused on the South African economy have suffered enough, said Credit Suisse.
Investors should start to accumulate these shares, funding this by booking profit on rand hedges that benefited from weakness in the currency, while keeping South Africa at benchmark levels in an emerging-market portfolio, London-based Alexander Redman and Arun Sai wrote in a note.
Negative sentiment has reduced domestic South African stocks to the cheapest compared with emerging-market peers in almost a decade on a price-to-future-earnings basis, the analysts said. They offer a dividend yield 56% higher than the emerging-market aggregate, while rand hedges yield less than half that of developing nation shares.
There are reasons to be more optimistic, the Credit Suisse analysts said. They expect some appreciation in the rand, while predictions about South African economic growth are overly pessimistic.
Sturdier household finances suggest consumer spending may recover, while the earnings outlook for domestic companies is improving. Plus, there’s evidence that heavy foreign selling of South African assets may almost be done.
South African value stocks creating yield plays include First Rand Ltd, Standard Bank Group Ltd, Vodacom Group Ltd, Sanlam Ltd, Nedbank Group Ltd, RMB Holdings Ltd, Exxaro Resources Ltd and Mr Price Group Ltd, the analysts said.
“During our June/July investor roadshow we noted that the intensity of questions we fielded relating to domestic South Africa from emerging equity managers had discernibly increased relative to previous trips,” they wrote.