BofA Merrill Lynch backs SA in 2010

Sometimes when big US banks make a call it’s worth betting in the opposite direction.  If there’s one lesson to take from the noughties, it’s that the guy on TV with the phrase “Analyst from XYZ Bank” tacked onto the end of his name is usually wrong, or right for the wrong the reasons, or right in the broken-clock-tells-the-correct-time-twice-a-day kind of way, or neither right nor wrong because he’s busy straddling the fence. 

So, reading yesterday that the now cumbersomely named Bank of America Merrill Lynch (henceforth in this article BofAML) has picked South Africa as one of its top 4 offshore investment destinations in 2010 is done so with some trepidation. 

Hopefully the boffins at BofAML don’t bring the financial commentators curse to these shores.

But, the above cautions noted, it is encouraging to see some sense prevailing among some of the mainstream investors out there.  BofAML reckons BRIC remains a lucrative acronym but adds SA to its favourites list, so is it BRICSA for 2010? 

Hardly.  SA still has a long way to go to be considered part of the bigger league, but the point remains – if you’re looking at yield vs debt metrics vs sovereign ratings vs growth potential, SA has to be a strong bet which is one of the reasons the rand is going to keep getting much stronger vs the majors. 

BofAML reckons exposure to commodities, steady real income growth, and the World Cup will boost earnings potential in 2010.  Well, 2 out of 3 ain’t bad.  Readers know our views on the economic anvil that is the FIFA World Cup, but there’s no doubt that commodities have more big upside and SA mines are recovering after a mostly forgettable 2009. 

Then there’s the real income story.  It’ll be more a bottom line issue than a top line one in 2010.  That’s to say the benefits of very small (if any) consumer price increases in 2010 will be the bigger factor than job growth and pay hikes.  By the time employers catch on though they’ll still have pushed through 5-6% increases to their employees, and this in a falling CPI environment will be a boost for retailers.

But it won’t all be hunky dory in 2010.  Foreign inflows will be solid more because of rate differentials and offshore sovereign risk problems than big domestic growth potential per se.  Eskom tariff hikes will suck a lot of revenue out of household and business coffers at a time when new bad debts and credit impairments are not showing any signs of abating.  Job losses have been brutal in 2009 and with the unions getting very bolshy again of late employers are not exactly going to be clamouring to hire any time soon. 

Stocks in SA are probably priced for 2.5-3.0% GDP growth in 2010, and any undershoot of that makes current valuations look stretched.  Any further equity price gains from here are pure froth.  

It will be more on the government bond market side that foreigners get excited given the prospects for 8.5-9.5% yield in Q1 2010 and capital gains in a very strong rand and benign consumer price inflation environment. 

Full Bank of America Merrill Lynch report below

BofAML – Asia and GEM Monthly Wrap Dec ‘09