Goldman bullish on SA banks

A recently published note by Goldman Sachs suggests investors should be “long emerging market banks versus consumer staples”.

It says “banks emerged as one of the worst-performing sectors in Q1 and so far have only recovered a quarter of the value lost”.

It adds: “The underperformance has been driven by multiple factors, including rising non-performing loans and, in some cases, asset purchase programmes and deep rate-cutting cycle, flattening curves and eroding net interest margins.

“We push back against the view that these headwinds will be sustained,” it says.

“The NPL [non performing loan] cycle already appears to be significantly priced in across EM [emerging markets], with current valuations already accounting for a rise in bankruptcies.

“We have found that the earnings cycle of banks in high-yielding countries … are inversely correlated with the level of interest rates and are less impacted by the slope of the yield curve.

“Central banks across EM have cut rates sharply since the start of the coronavirus crisis, and we would expect a credit growth rebound as activity recovers, with the potential for a vaccine to unlock the current value in bank sectors.

“Our preferred countries for a positive banks expression are Brazil, Russia, India, Mexico and South Africa, where earnings appear more tied to credit growth than net interest margins, and where a significant round of NPLs already appears to be factored into bank valuations.”

An additional fillip is provided by another relevant trade for our market: “long a roughly volume-weighted basket of MXN [Mexican peso], ZAR [South African rand] and INR [Indian rupee] versus USD [US dollar]”.

The bank says it first initiated this latter trade on October 9, because “emerging market high-yielding foreign exchange is one part of the emerging market asset complex where deep value still resides, suggesting more room to run from here”.

It says the peso and rand “each offer an attractive combination of high carry, undervaluation and high exposure to a cyclical upturn”.

Finally, a third boost comes from the investment bank’s call to be long SA government bonds (SAGBs).

It favoured the 10-year bond earlier this year but switched its preference to the six-year bond (R186) just before midyear “to maximise carry relative to duration and issuance risk”.

It says “while the country’s fiscal picture remains a source of concern for longer-term local asset returns, we would argue that yields on offer are still sufficient to compensate for the underlying risks”.

“The SAGB rally has of course compressed these risk premia, but on a relative basis, in a world that remains more starved of yield going into 2021 than initially anticipated, we still think that SAGBs is an attractive trade.

This article first appeared on Moneyweb and was republished with permission.