Banking Stocks Surprise Wrongfoots South African Money Managers

  • Citigroup strategist says outlook very different a year ago
  • ‘This was not the point in the cycle to be short banks’

Over-defensive South African money managers who have missed their performance benchmarks this year would be better positioned had they read signals that banking stocks were showing greater resilience than expected, according to Richard Schellbach, equity strategist at Citigroup Inc.

This time last year, the outlook for South Africa was starkly different, with the threat of economic recession looming, Schellbach said in an interview in Johannesburg. “But at the end of the first quarter, commodity prices were rallying, the currency was strengthening and inflation had come down. People started realizing that there wasn’t going to be a rate-hiking cycle; we’re going to avoid a recession.”

“This was not the point in the cycle to be short banks,” he said. “The average equity manager has struggled with performance this year; they’ve underperformed their benchmark and that’s likely because they’ve been positioned too defensively.”

Johannesburg’s banking index has rallied 23 percent year to date, in contrast with a 16 percent slump in the benchmark retailers gauge. South African lenders have remained well-capitalized and while non-performing loans are rising, they have tightened credit and lowered their risk appetite, Schellbach said. And they could have further to run.

“As we look into 2017, the top-down conditions for emerging-market banks’ outperformance to continue remain in place.”