Retail a guide to foreign sentiment on SA – Absa

If you want to check what big foreign investors really think about South Africa’s long-term prospects watch retail stocks rather than the knee-jerk reactions of international fund managers in the overall equity, bond and currency markets.

The tip comes from market-watchers at Absa Asset Management Private Clients, the arm of Absa Investments that focuses on the investment needs of high net worth individuals.

Going on recent slides by the rand and our equity market – largely attributable to offshore selling – it seems foreigners are turning their backs on South Africa, but this is far from the case, says Absa Private Clients analyst Chris Gilmour.

“The long-term view is not so negative if you check the JSE’s retail sector,” says Gilmour. “Big overall dips in our financial markets, might grab the headlines, but it’s not all bad news if you look deeper.

“Our retail sector does not have the hair-trigger qualities of the currency market and in some respects gives a better insight into long-term thinking by astute foreign investors.”

The mismatch is created by the highly liquid nature of our financial markets. Foreign fund managers can buy in, or get out, very quickly.

As a result, says Gilmour, fund managers in major financial centres often use South Africa as a proxy for emerging markets in general. If risk aversion rises as a result of events in Europe, adverse sentiment then affects all supposedly risky emerging markets, with South African assets among the first in the firing line.

Significantly, investment flight was not evident in the retail sector – a favourite with foreign investors in recent years.

“The typical foreign holding across our leading retailers hovers around 40-50%,” says Gilmour. “Massmart has the biggest foreign holding, around 70%.

“We saw no signs of a foreign sell-off in mid and late May when some other indices reflected negative foreign sentiment. Foreigners in the first half of the year remain net buyers of our retail stocks. This is reassuring as they tend to take a long-term, rather than an opportunistic, perspective.”

Gilmour lists several retail positives from an offshore perspective, including:

*First world management, systems, controls and reporting
*Third world growth, as indicated by the rapid emergence of a new middle class and general population growth
*A youthful population profile, suggesting strong underlying demand for fashion and aspirational brands

“Some local observers believe our retail stocks are ‘priced for perfection’ with price-earnings multiples around 30,” notes Gilmour.

“That might look expensive, but to date foreigners are more focused on strategic factors and regard our retail stocks as a long-term play. Dividend yields are also good, ranging from 3% to 5.1%. The yield and the long term keep the foreigners interested.

“If they walk away at some stage despite these factors then maybe it will be time to start worrying about foreign sentiment.”