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Home Archive of News UBS CIO upgrades South African Equities

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UBS CIO upgrades South African Equities

CIO introduced its underweight position in South Africa in May. Since then, the market underperformed the MSCI Emerging Markets equity index by 5.4 percentage points. South Africa still faces macroeconomic challenges: In 1Q17 the economy expanded by just 1% year-on-year, and contracted by 0.7% relative to the prior quarter, pointing to a technical recession. However, CIO believes equity prices now likely reflect these factors.

The upgrade comes as CIO issues a dedicated report on Africa's sovereign credit prospects, an important benchmark used to evaluate the risk of investing in a country. Although the outlook for South Africa itself is more cautious, the report concludes that after years of deterioration, the credit outlook of many African sovereign issuers is stabilizing or improving.

Across the continent, Africa’s sovereigns have been hit by a range of issues in recent years, including the end of the commodity super cycle, depreciating exchange rates and mounting public debt ratios. As a result, several sovereigns experienced multiple-notch downgrades. Downgrades send a negative signal about a country's economic prospects to investors.

According to the report's findings, however, macroeconomic prospects in the region are beginning to improve. The International Monetary Fund (IMF) forecasts real GDP growth to almost double this year in Sub-Saharan Africa, reaching 2.6 percent, while fiscal and current account deficits are expected to have peaked at 4.5 percent and 4 percent last year, respectively. Key drivers supporting the outlook include rising global growth and trade, a modest recovery in energy and base metal prices, more competitive exchange rates for African currencies, and structural reforms in a range of countries.

Ali Janoudi, Head of Central and Eastern Europe, Middle East and Africa, France and Belgium International at UBS Wealth Management, said: "Despite continuing challenges affecting the country's economy, South Africa's stock markets still boast highly competitive companies in fields like healthcare as well as extractive industries. For investors, recent weakness in South African stocks may present an opportunity to bolster holdings on a tactical basis."

Michael Bolliger, Head of Emerging Market Asset Allocation at UBS Wealth Management's CIO, said: "Although South Africa faces still macroeconomic headwinds, an underweight position in South African stocks is likely no longer appropriate, due partly to reasonable valuations on offer. In our view, the market is in the process of bottoming and a more neutral stance is more suitable on a six-month view."



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