The Merrill Lynch survey of South African fund managers in March saw managers turn net sellers of equities for the first time since 1998, but over 12 months, managers remain equity bulls and cash and bond bears.
In March 2003, all managers thought equities offered value, but a year later only a net 14% think so.
Two-thirds of managers expect South African interest rates to rise in the second half of this year compared with half in the February survey. A quarter of managers expect the rate hike to come in the third quarter compared with 7% in the February survey.
The rate hike expectations are based on a stronger economy and higher inflation expectations with a net 93% (88% in February) expecting the economy to be stronger and inflation to be higher in 12 months’ time.
The forecast for the 12-month all share index earnings per share (EPS) edged up to 13% from 11% in the February 2004 survey and 6,7% in the December 2003 survey. The survey-record low forecast of 3,7% was set in July 2003.
A survey record net 86%, compared with a 69% in February, are overweight equities. Net buying of equities has evaporated with the result that cash levels will rise or remain stable.
Fund managers are more bullish on the rand over 12 months with a median forecast for March 2005 of R7,27 per US dollar compared with last month’s forecast of 7,56 for February 2005 and the January forecast of R7,69 per dollar.
The range in the March survey is from 6,60 to 7,70 compared with February’s range of 6,91 to 7,95 and the January range of 6,65 to 8,40. December 2003 saw a median forecast of R7,18 per dollar in December 2004 compared with the November forecast of 7,55 in November 2004.
In the November 2002 survey, the median forecast was still above R10 per dollar at 10,36, which was far better than the median of 10,90 in the October 2002 survey and 11,27 in the April 2002 survey. The monthly average for November 2003 was in fact only 6,74.
This is consistent with the survey history since January 1998 when fund managers have generally expected the rand to be weaker in 12 months than the actual result.
The exception to this rule was in 2001, when the 12-month forecast was stronger than the actual.
In December 2001, the rand reached a record worst level of R13,86 per dollar, R20,0866 per pound sterling and R12,4790 per euro. It finished 2002 at R8,59 per dollar, as the rand was the best performing currency against the US dollar in 2002.
On December 3 2003, the rand reached its best level since January 2002 when it touched R6,0910 per dollar.
The March 2004 survey foresees interest rates rising from the January 12-month record survey lows with the repo rate at 9,13% from February’s 8,87% and 8,26% in the January survey and 8% currently, while the 10-year bond yield is forecast to rise to 9,96% from 9,60% in the February survey and 9,17% in the January survey and 9,40% currently.
In the March 2004 survey, the percentage allocated to offshore assets varied from 9% to 15% with an average of 12,4%, just below January’s and February’s 12,6%. The record high of 18,5% was set in April 2002.
In March 2004, fund managers cut their exposure to offshore bonds to 25,8% of the total offshore holdings from 37,3% in February. This compared with a prior recent low of 27,5% set in November 2003 and a recent high of 40,3% set in August 2003.
The total South African fund managers’ asset allocation into domestic equities edged higher to 63% from February’s 61,7%, January’s 61,9%, December’s 59,8%, and November’s 62,7% after it had remained at 56,3% for three consecutive months.
The exposure to domestic bonds was reduced to 15,4% from February’s 15,8%, January’s 16,9%, December’s 17,5% and November’s 17%. Fund managers cut their exposure to property to 1,5% from 2,2%, while cash was steady at 7,8% from January’s 6,4%. It was below October’s 8,5% and May’s 10,1%. – I-Net Bridge