Oversold Bank Stocks Bashed for ‘South Africa Inc.’ Proxy Status

(Bloomberg) -- The weight of bad news about the economy has proved too much for bank stocks traded in Johannesburg, pushing a sector index to technically oversold levels for the first time in more than two years.

While the index was 1.2% higher Tuesday, rising for the first time in six sessions as a stronger rand brought some relief, it has dropped 15% since President Cyril Ramaphosa pledged a relentless focus on growth in his June 20 state-of-the-nation address. That's dragged its 14-day relative strength index below 30, a reading that signals the decline may be too steep and one not seen since April 2017.

Gross domestic product contracted the most in a decade in the first quarter, while unemployment is the highest in 11 at least years, ratcheting up the strain on South African consumers. The government is pledging billions of dollars to keep the state power utility afloat and two of the three major credit-ratings companies assess South Africa's debt as below investment grade. Investors have been punishing shares in lenders over the bleak picture.

“Banks, more so than retailers, have been seen as a proxy for South Africa Inc. exposure,” said Nolwandle Mthombeni, an analyst at Mergence Investment Managers in Cape Town. “As such, they have reacted to the poor sentiment around the economy.”

Valuations reflect reduced expectations for profits as the grim South African economic outlook weighs on lenders. The average ratio of share price to estimated earnings for the banks has dropped to 9.2 times, compared with a 5-year average of 10.5. The FTSE/JSE Africa Banks Index's has fallen 6.6% this year, compared with a decline of 1.1% for an index of emerging-market peers.

Nedbank Group Ltd. bemoaned a worse-than-expected economy Tuesday as it reported first-half results, cutting its forecast for 2019 GDP growth to 0.5% from 1.3%. More urgency is needed in structural reforms to stem economic and fiscal deterioration, the country's fourth-largest lender said.

“The banks' performance is a classic sell-off due to our macro environment,” said Casparus Treurnicht, a money manager at Gryphon Asset Management. “Consumers and South African business are taking strain and investors understand this will filter through to the banks.”

To contact the reporter on this story: Adelaide Changole in Nairobi at achangole2@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen, Monica Houston-Waesch

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