Bank of America Merrill Lynch has published the findings of its latest fund manager survey, showing how local investors feel about government’s plans on Eskom and the chances of the country being downgraded to junk status.
According to the survey results, there appears to be a return to hope among fund managers, with their position on several economic metrics turning to be more positive – particularly in the tobacco, platinum and banking sectors.
Looking at the next 12 months, a majority of managers (60%) see South Africa’s economy improving (up from 30% in last month’s survey), with possible rate cuts on the cards.
However, clear risks still remain, with worries over the country’s creeping economic growth being top of the list for many investors, as well as persistent uncertainty over Eskom.
40% of fund managers point to weak earnings by companies as the biggest domestic risk to South African equity performance over the next 12 months.
This is followed by 27% worried about government policy shifts ‘to the left’ leaning into more populist programmes – pushing ahead of concerns over a credit rating cut to junk status (20%) which was the number-two concern in September.
Other big risks include Eskom (7%), as well as the weaker position of South African consumers (7%), the survey showed.
Land reform, which was something highlighted as a major risk factor in past surveys, got nary a mention, along with things like rand volatility, monetary policy and unemployment.
Concerning Eskom’s financial position, most fund managers are unsure what will happen over the next 12 months. 27% believe that there will be a financial solution for the embattled power utility while 33% don’t see its financial woes going away any time soon.
Operationally, things are bleaker – with only 20% believing the group will achieve operational stability in the next 12 months. The majority (53%) do not see this happening.
Eskom, which supplies about 95% of the country’s power, has R450 billion of debt and is surviving on state bailouts after massive cost overruns at two partially completed coal-fired power plants.
While the fund managers are still uncertain about South Africa’s rating future – there is a sharp move away from the near-absolute certainty expressed in August that the country will be downgraded to junk in 2020.
The survey showed that around 40% of fund managers expect South Africa to drop out of the World Government Bond Index (WGBI) in 2020. This is down from 60% in September, and 90% in August.
This reflects the managers’ views on the likelihood of a credit downgrade by Moody’s in the next 12 months, as it is the Moody’s rating – currently, the only one keeping South Africa in investment-grade – that is preventing the country from being booted out of the WGBI.
Despite this turn in pessimism, there are also fewer fund managers are confident that South Africa will stay in the index – dropping from 30% in September to 27% in October.