Financial sector ytd review and broker ratings

We look at how major constituents of the Financial Index have performed for the year thus far, what’s behind the major moves as well as current broker ratings and trading opportunities that may be presenting themselves within the sector.

The South African Financial Index

The South Africa Financial Index (FINI) shows the index to be trading (as at the 24^th of October 2019) at similar levels to where it had started the year. Made up of the 15 largest financial companies listed on the JSE (by market capitalisation), the index can often be considered a reflection on the health of the local economy, SA Inc.

A weak GDP outlook (+0.6% in 2019 forecast by the South African Reserve Bank) combined with global threats to economic growth (such as the ongoing trade narrative) have been limiting the upside potential for the index.

USD/ZAR vs South Africa Financial Index

The above chart shows the movements in the rand (blue) relative to the South Africa Financial Index. With the bulk of earnings from shares which make up the index derived locally, we see how a weakening ZAR has been correlating with weakness on the Index (red arrows), while strength in the ZAR has been correlating with gains in the Index.

While there is the suggestion (through purchasing-power parity) that the rand is undervalued at current levels, global narratives such as the ongoing trade war and domestic events such as the Mid-Term Budget Speech, Eskom and a ratings review (by Moody’s Investor Relations) remain risks to the outlook for the rand.

Financial Index Constituents – Year to date performance

There has been quite a wide dispersion between the gainers and losers on the FINI year to date.

Reinet Investments has led gains within the finance sector, tracking a price surge in British American Tobacco, its most significant investment holding. The company has also embarked on a share buy back scheme over the last year, increasing the demand for the stock whilst reducing the supply to the market place. A share buyback scheme is often considered a suggestion that the company (in this case Reinet Investments) believes its share price to be undervalued.

Capitec Bank has also been a significant gainer this year with earnings growth far surpassing that of its major banking peers. Interim results showed the group to have grown headline earnings per share by 20% against the prior year’s comparative period.

Discovery Ltd has been the most significant underperformer on the South African Financial Index, having declined more than 20% year to date. The group is the most highly geared of the Financial Index constituents to the medical insurance industry in South Africa. An outline of the new National Healthcare Insurance (NHI) bill, that government intends to roll out, was met with a significant decline in the Discovery share price. Wording of the bill has suggested that private medical aid cover may only be allowed to cater for procedures not covered by the NHI. FY19 results also reflected another tough trading period for the group as normalised headline earning per share contracted by 8% year on year. Earnings for the group were impacted by a weak performance from the Discovery Life business unit on unusually high claims. The group has also seen a sharp rise in capital expenditure from the development and launch of the Discovery Bank business unit.

The above table shows a Thomson Reuters’ poll of analyst ratings on the Financial Index constituents. It should be noted that these ratings are a longer-term view (12months +) on the stocks considered.

ABSA, Investec, Nedbank, NEPI Rockcastle, Old Mutual, Sanlam and Standard Bank are the favoured counters within the sector, all carrying an average broker rating of ‘Buy”.

Capitec, Discovery, Firstrand, Growthpoint, PSG, Redefine and RMB Holdings all carry an average broker rating of ‘Hold’.

There are no average broker ratings of ‘Sell’ within the Financial Index constituents at present.