Following the Reserve Bank’s latest decision to hold rates this week, Bank of America Merrill Lynch has published a new investor survey describing how foreign investors see the South African market over the next 12 months.
According to the report, wealth managers generally expect a weaker rand, higher bond yields and a slightly higher repo rate in the next 12 months.
While the overall view is that South Africa’s economy is expected to improve over the period, key concerns remain – specifically the country’s weak earnings backdrop, which was identified as the biggest domestic risk, followed by questions hanging around land reform.
Other issues that are stunting economic growth include a volatile rand, weak consumer spending, lack of skills, high levels of unemployment, and shifting policies, Merrill Lynch said.
Most have taken a wait and see approach towards local asset and equity allocations, with fewer (less than half) being comfortable with the pace of reform under new president, Cyril Ramaphosa.
The South African Reserve Bank’s monetary policy committee on Thursday voted to keep the repo rate unchanged at 6.5%, with a base home loan rate of 10%.
However, the central bank’s governor Lesetja Kganyago revised the country’s expected GDP growth for 2018 to 1.2% from a previous estimate of 1.7%.
While the rate hold was largely anticipated, the downward review of the growth rate caught many by surprise.
The rand weakened on Thursday on the clear warnings from the central bank that risks to inflation were rising and the outlook for economic growth had worsened, which ultimately extended a selloff from earlier in the session.
The 12-month rand forecast weakened further to R13.98/US$, compared to R13.38/US$ forecast in June.
Managers’ repo forecast over the next 12 months increased to 6.8%, compared to (6.65% last month). Managers also expect a repo hike sooner rather than later, with most expecting it to hit in the second quarter of 2019 – though some anticipate it as soon as the last quarter of this year.