Where investors are putting their money in South Africa

South African assets are set for a boom, with equities, bonds and cash set for a strong year.

According to Bank of America’s latest fund manager survey, the projected total returns for equities over the next 12 months are 17%.

R2035 bonds and cash holdings are set to grow 13% and 8% over the next year, respectively.

A record 56% of managers expect meaningful returns, which will be driven by a stronger rand and lower interest rates, with the former expected to reach R17.12/$.

A net 89% of fund managers are overweight on domestic stocks, with a particular focus on banks, apparel retail, and general industries.

Bank of America said this reflects the growing confidence in South Africa’s equity market.

That said, resources and real estate remain out of favour.

A strong 67% of managers also believe that local equities are undervalued and signal potential growth opportunities, while 33% see value in bonds.

Interest rate cuts and their opportunities

The respondents said that repo rate is also forecasted to trough at 6.66%.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) decided last week to cut the repo rate by 25 basis points from its 15-year high of 8.25% to 8.0%.

This was due to lower inflation figures (4.4% in August, which is below the SARB’s 4.5% target) and the US Federal Reserve cutting rates by over 50 basis points.

Curate’s Ali Simpkin said that yields of fixed-income asset classes are declining globally, with the rate-cutting cycle now underway.

When interest rates fall, the yields on traditional savings products and bank deposits usually decline.

Although many then search for higher yields in riskier investments, a lower interest rate environment can allow certain asset classes, like fixed income, to thrive.

Despite a recent yield rally, South African fixed income assets remain attractively valued.

According to Simpkin, nominal bonds, yielding around 12.81% year to date (as of 31 August 2024), and inflation-linked bonds, yielding just over 5% over the same period, are still set to deliver solid returns over the medium term.

The value of existing bonds can increase when rates fall, as their higher fixed yields become more attractive compared to newly issued bonds with lower yields.

This creates a more favourable environment for fixed income investments, allowing them to perform well even as broader market conditions shift.

There is also a global hunt for yield when rates are cut in developed markets.

When central banks in major economies cut interest rates, investors often turn to emerging markets, which offer higher yields due to higher risk premiums.

This can be good news for South Africa, as the shift leads to increased investment as global investors look to benefit from the higher returns relative to other government debt.

South African asset classes, which offer significantly higher yields after adjusting for inflation, could thus become far more attractive to investors.

Nevertheless, cash is still an essential tool within any portfolio as it ensures that one’s portfolio is well-prepared for whatever opportunities arise, it provides liquidity and helps to save for an emergency.

Read: What to expect for interest rates in South Africa after the Fed’s 50 basis point cut