BofA survey: 94% of SA fund mangers say bonds are undervalued

The Bank of America has released its South Africa Fund Manager Survey, revealing some interesting insights into the sentiments and strategies of fund managers in the region. According to the survey, a record 94% of fund managers believe that bonds are undervalued, while 72% think equities are also undervalued. John Morris, South Africa Strategist at Bank of America Merrill Lynch, elaborated on the key findings of the survey. He noted that managers are more positive on valuations compared to the previous month, with a significant majority viewing bonds and equities as undervalued. This optimistic outlook on valuations suggests potential positive returns in the next 12 months for both asset classes. One noteworthy observation from the survey is the trend of decreasing cash levels among fund managers. Despite the competitiveness of cash investments with sub-raising rates, a large number of managers expressed the intention to reduce cash holdings. This shift indicates a growing confidence in better returns from bonds and equities in the coming year. Regarding offshore investments, the survey revealed that fund managers' decisions are influenced by the strength of the South African rand. When the rand weakens, managers tend to hold back on foreign investments, while a strengthening rand prompts an increase in offshore investment intentions. This dynamic relationship underscores the impact of currency fluctuations on investment strategies. In terms of sector preferences, the survey showed a defensive positioning among fund managers. Sectors such as banks, healthcare, and tobacco were favored over gold, beverages, and real estate. The defensive stance can be attributed to market volatility, slow global growth, and soft commodity prices, leading managers to prioritize sectors perceived as more stable and resilient. While consumers' outlook remains cautious, there is a growing interest in sectors like general retail and apparel retail, which are potentially more leveraged to rate cuts. Fund managers are closely monitoring the implications of potential rate cuts on different sectors, with a preference for defensive sectors like banks amidst the ongoing tightening cycle in South Africa. Looking at the economic landscape in South Africa, fund managers are cautiously optimistic, with expectations of a recession this year. However, there is a less bearish outlook on the economy compared to previous surveys, likely influenced by improving inflation expectations and the anticipation of rate cuts in the next year. Despite some positive sentiments, concerns about government reform and economic challenges, particularly related to Eskom and policy uncertainties, continue to weigh on managers' outlook. Overall, the survey paints a complex picture of fund managers' strategies and sentiments, reflecting a balance of optimism and caution in navigating the current investment landscape.