BofA: 'Significant increase' in investor optimism

South African fund managers have expressed increased optimism towards equities, setting a higher price target for the JSE All Share Index. A recent Bank of America Fund survey revealed that fund managers are now targeting 91,000 for the index in the next twelve months, up from the previous target of 86,000. This surge in positive sentiment is attributed to several factors according to John Morris, South Africa Strategist at Bank of America, who recently appeared on CNBC Africa to discuss the survey results. Morris highlighted the positive feedback received from the survey participants, signaling a bullish outlook on equities and supporting double-digit All Share returns in the coming year. One of the key drivers of this upbeat sentiment is the recent political developments in the US and the potential impact on South African assets. Morris mentioned the importance of a weaker dollar for the South African market, which could result in a stronger rand, lower bond yields, and overall benefits for domestic assets. The survey respondents are forecasting a rental exchange rate of $17.47 in twelve months, with expectations of EM risk-on sentiment driven by a weaker dollar and possible Fed rate cuts. This outlook has led fund managers to shift from defensive positions to a more cyclical approach, showing high conviction in domestic sectors. The bond market also witnessed significant activity, with investors showing growing interest in South African bonds post the elections. Despite a recent rally that brought bond yields down to just under 11%, a majority of managers still view bonds as undervalued, indicating a preference for both equities and bonds in their portfolios. Foreign inflows into the bond market have been strong, with significant investments contributing to positive returns for investors. However, concerns remain regarding the outlook for earnings in the economy, as the growth rate continues to be modest. While the forecast suggests a 10% earnings growth, the managers acknowledge the challenges posed by a weak earnings environment. The survey respondents are hopeful for a stronger economy in the future, with an increasing number expecting reform to accelerate, which could have a positive impact on earnings going forward. Another risk highlighted by investors is the possibility of policy shifts to the left, which could potentially unsettle the market. This concern stems from previous instances of political uncertainty and policy changes, leading to nervousness among investors. However, with the formation of the Government of National Unity, some of these fears have subsided, and the focus has shifted towards more positive developments and reforms. In terms of sector preferences, the survey revealed a preference for sectors like banks, apparel, retail, and software, while gold and defensive sectors were deemed less attractive. The sentiment towards gold was particularly interesting, with managers showing a neutral stance in the short term but maintaining an underweight position in the long term. Factors such as Fed rate cuts, geopolitical uncertainties, and a weaker dollar could influence gold prices in the short term, but the metal's long-term performance has not been as promising compared to other sectors. Overall, the survey results indicate a significant increase in investor optimism towards South African equities, driven by positive market developments and expectations of favorable outcomes in the coming months. Fund managers are positioning themselves strategically to capitalize on potential opportunities in both equities and bonds, while keeping a watchful eye on risks and challenges that may impact market performance in the future.