Foreign interest in SA stocks is growing, but reforms are needed: Franklin Templeton


Foreign investors have responded much more favourably to Brazil’s reform agenda than they did to South Africa’s because the Brazilian state can execute its plans better. That is the view of Franklin Templeton Emerging Markets Equity executive director Danesh Ranchhod.

‘At a fiscal level, Brazil was similar to South Africa in 2015,’ Ranchhod told Citywire South Africa.

‘It had also developed a reform agenda, though investors better received it due to the Brazilian government’s ability to execute, which translated into strong market returns.’

Still, Ranchhod said interest from foreign investors in South Africa has grown over the past six months: more investors have registered at South African investment conferences than in previous years.

‘However, this interest hasn’t translated into positive net inflows for the equity market over the past year,’ he said.

‘While many investors appreciate South Africa’s reform agenda, they remain disappointed by its execution. These relate specifically to Eskom, the government wage bill and state corruption.’ 

He said Franklin Templeton shared the disappointment about the government’s execution of its reform agenda and the resulting economic impact.

‘However, domestic market valuations are attractive, and certain sectors are trading at levels that price in an excessively gloomy economic picture, which we think is unrealistic. 

‘There have also been wholesale foreign purchases of South African companies such as Distell, Consol, Imperial Logistics and Long4Life. This confirms that valuations are attractive in some industries. The Covid-19 pandemic has consequently created favourable entry points into certain sectors.’

Banking, healthcare and retail stocks
Ranchhod said share prices for healthcare and banking stocks were not pricing in a recovery. This was evident when looking at the normalised earnings of companies in these sectors.

He said recent reports on banks showed improving trends for mortgage loan growth.

‘Relief books have performed better than expected, while exposure to Covid-19-compromised sectors remains low. There is also adequate capital and a greater focus on costs.’

Ranchhod said Franklin Templeton saw opportunities in select retail firms.

‘One has a restructuring element to it while the other is a high-quality apparel business proven to show strong returns on incremental capital invested over the long term. There is also room for share gains because the listed apparel segment has weaker players that have inadequately evolved their business model over the past decade.’

On healthcare stocks, he said the market was pricing in a much lower occupancy level when normal conditions resume and an extreme decline in medical insurance membership for the domestic private hospital operators.

‘We have observed private hospital groups increasing occupancy with each pandemic wave, as they manage Covid-19 wards more efficiently, and a marginal decline in medical insurance membership. The backlog in elective procedures remains but will likely start to subside as we move towards a world that manages Covid-19 as part of daily life.

‘We are already seeing this start to unfold with the omicron strain being much less severe than previous ones. Additionally, there is potential to access the “out-of-pocket” expense market, creating a new runway for hospital operators.’