Rate Hike Expectations Fail to Deter SA Equity Fund Managers

South African monetary policy sits at the centre of a widening debate among the country’s institutional investors, after a Bank of America survey showed fund managers turning markedly more optimistic on local equities even as a large majority braced for further interest rate increases.

The survey found that a net 75% of respondents expected rates to rise, a sharp shift from 33% previously, and 75% of those polled believed a hike would come next month. Respondents mapped out a policy path of a rate increase in the fourth quarter of 2026, another in the first quarter of 2027, and a cut in the second quarter of 2027. The hawkish turn on rates stands alongside a striking improvement in market sentiment: a net 90% of fund managers expected the market to rise over the next 12 months, up from 64% last month and the highest reading since August 2021.

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BofA investment strategist Sebastian Raedler said the six-month outlook had also improved, with a net 70% expecting gains compared with 64% previously. Expected 12-month equity returns rose to 11% from 10.5%, while earnings-per-share growth expectations increased to 12.5% from 11.7%, he said in a statement.

Not all economists accept that further tightening is warranted. Johann Els, chief economist at PSG Financial Services, said on Wednesday: “For now, I do not see the need for further rate increases. The Reserve Bank has been pre-emptive, hiking in May and again in September. There are risks, of course. The sharp petrol price increase at the start of October could lead to further second-round effects.” Els added that sustained higher petrol prices could ultimately prove deflationary, squeezing household budgets and raising business costs, with consumers substituting cheaper alternatives and putting downward pressure on inflation.

Meanwhile, the survey’s rate expectations were mirrored in managers’ 12-month forecasts, which shifted to a repo rate of 7.25%, an R2035 government-bond yield of 8.90% and a rand-dollar exchange rate of R16.49 to the US dollar, from 7.07%, 8.82% and R16.09 respectively. The macroeconomic outlook improved modestly, with a net 50% expecting the economy to strengthen over the next 12 months, up from 45%, and a net 80% expecting lower inflation, compared with 73% last month.

The survey also showed how conviction on equity valuations weakened even as buying appetite climbed. Thirty percent of respondents viewed equities as undervalued, down from 45% the previous month, yet a net 90% saw more buying than selling opportunities, up from 73%. Amid global uncertainty and higher oil prices, 90% of respondents said they intended to maintain existing positions, the highest level since the survey began in January 2021. The main domestic concerns remained a weak earnings outlook, a perceived shift in policy to the left, sticky inflation and monetary policy.

Positioning data showed total equity allocation declining to 70% from 74%, comprising 39% in domestic equities and 31% offshore. Managers remained a net 20% overweight South African equities and net 20% buyers over the next three months. Cash positioning became more underweight at a net 60%, compared with 45% previously, though the incentive to deploy cash moderated, with net selling of cash falling to 10% from 36%.

Sector positioning remained concentrated. Metals and mining stayed the largest overweight for a sixth consecutive month, easing to a net 15% from 18%. Banks increased to a net 12% overweight and software held at a net 10%, with both extended relative to historical levels. Healthcare was the largest underweight at 9%, followed by personal goods and life insurance at 7% each. Over the next 12 months, banks were the most preferred sector, followed jointly by retailers, which recorded the largest gain in sentiment, and software. Resources moved into net bearish territory, led by platinum, though metals and mining stayed positive. Beverages were least preferred, followed by investment banks and brokers.

By contrast, a separate note on investment perspectives for the third quarter ended September from PPS Investments portfolio manager Reza Hendrickse found South African assets had delivered mixed returns. Weak domestic growth remained a concern, but improving fiscal fundamentals and greater policy credibility continued to support the longer-term investment case, he said. Emerging-market equities gained 22.1% in rand terms over the first nine months, against 10.6% for developed markets, though emerging markets slipped 0.3% in the third quarter. Much of the strength came from Asian technology markets, particularly Taiwan and South Korea, which benefited from demand for semiconductors and memory products tied to artificial-intelligence investment.

“South Africa has not participated in this rally to the same extent. The FTSE/JSE Capped All Share Index declined 0.3% during the quarter, taking its year-to-date loss to 3.1%. Much of the divergence reflects differences in market composition. The JSE has relatively little direct exposure to the AI supply chain, while weakness in some of its largest constituents has weighed heavily on performance,” Hendrickse said.

Whether the Reserve Bank delivers the hikes fund managers expect, or holds off as Els argues it should, will shape how the optimism now priced into local equities holds up through 2027.