SA Investment Strategy | Asset Allocation 2019: OW SA Equities

Post five-year-CAGR SA equity returns of 2.6%, we recommend a rotation into SA equities in 2019, upgrading SA equities to Overweight from Underweight. We expect ~12% total returns from SA equities in 2019, in local currency terms, (based on ALSI eps growth of 9% CAGR over the next two years (below consensus expectations of c.12% CAGR 2019- 2020), moderate multiple de-rating, and a DY of 4%). We are Neutral cash with expected returns of 7%. We see a high likelihood of a Moody's negative rating outlook on SA. That said, SA's de-facto credit rating remains a notch below that assigned by the rating agencies. A rating downgrade by Moody's will probably not trigger a big bond market sell-off. While we forecast total returns of 7% from SA bonds (R186 exit bond yield of 9.3%), we recommend UW SA bonds relative to cash on a risk-adjusted basis and would look for a better entry point (post budget, rating outlook changes).