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South Africa’s benchmark stock index is set for further gains as it approaches its best year since 2012, thanks to a weakening rand, attractive valuations, and supportive monetary policy.
The FTSE/JSE Africa All Share Index has set several new highs this year, rising nearly 20% compared to the MSCI Emerging Markets Index, which was down 7% as of Tuesday morning.
The Johannesburg index is up more than 10% in dollar terms, led by the travel and leisure sector and telecommunications firms. With inflation still within the central bank’s target range, investors believe policymakers will refrain from raising rates aggressively in order to support a fragile economy recovering from the pandemic.
Accommodative policy, combined with a weaker rand, which boosts index heavyweights with foreign-currency earnings, may help sustain index gains even as the Fed reduces stimulus.
“We have a positive outlook for South African equities in 2022, expecting double- digit returns,” said Jonathan Kennedy Good, a Johannesburg-based analyst at JPMorgan Chase & Co. “Above-trend GDP growth and still low – albeit gently rising – rates in South Africa should help equity returns.
A weaker rand should boost off-shore earnings over domestics.” JPMorgan favors the chemicals sector, where Sasol Ltd., a fuel-from-coal producer, is expected to benefit from higher oil prices despite coal production issues, as well as platinum-group miners, which are expected to benefit from rising carmaker demand.
According to strategist David Aserkoff, it’s also overweight telecoms, with MTN Group Ltd. expected to benefit from a growing fintec business in Africa as well as increased data demand.
Even after this year’s gains, the FTSE/JSE Africa All Share Index’s valuations remain significantly lower than those of emerging-market peers. Allan Gray, South Africa’s largest privately owned money manager, sees this as a buying opportunity.