HSBC Sees Buying Opportunity in South Africa Amid Zuma Turmoil

JOHANNESBURG (Capital Markets in Africa) – While some stock investors may choose to flee South Africa as political turmoil engulfs President Jacob Zuma, HSBC analysts argue the noise around the embattled leader and his ruling party makes it a good time to buy.

That’s because a pick-up in the South African economy and a favourable commodity price cycle as China, the biggest consumer of metals, avoids a hard landing are positive for the local market. In addition, elections due in 2019 should deter Zuma’s African National Congress from policies that harm the economy for fear of defeat at the polls, the analysts, led by John Lomax, head of global emerging market equity strategy at HSBC Bank Plc, wrote in a report.

“We are overweight the South African equity market and think that any rise in the political risk creates a buying opportunity in the context of a positive commodity cycle and domestic economic upturn,” they wrote.

Financials, consumer staples and technology shares are preferred by the HSBC analysts and their highest conviction buy-rated stocks have the potential to gain an average of 33 percent, based on the bank’s price targets. Companies on the list include construction and engineering company Aveng Ltd., Northam Platinum Ltd., grocer Woolworths Holdings Ltd. and media and digital giant Naspers Ltd., whose gain of almost 40 percent this year has sent the benchmark index to within 1,000 points of its all-time high.

Zuma’s dismissal of Finance Minister Pravin Gordhan at the end of March weakened the rand and prompted S&P Global Ratings and Fitch Ratings Ltd. to cut their ratings on Africa’s most-industrialized economy to junk. While he has been embroiled in a series of scandals and faced calls from within the ANC to step down, the latest attempt to remove Zuma at a weekend meeting of party executives fizzled out.

There is a good chance political risks will fall, the HSBC analysts said. The ANC’s December conference, where it will choose its next head, is “a natural focal point,” while the threat of losing to an opposition coalition in the polls two years from now should rein in any radical policy changes. “We see this environment as ultimately conducive to a reduction in perceived political risk, although its timing is very difficult to predict.”

While last year marked a low point for the economy, the HSBC analysts said underlying conditions remain poor, with the constraints on growth so heavy that expansion will remain below 1 percent this year. The South African central bank last week cut its 2017 growth forecast to 1 percent from 1.2 percent.