Jonathan Paledi, Head of Investment at Vunani
Local stock market is more on the expensive side
Vunani Fund Managers said it is cautiously navigating the equities’ bullish trend, to selectively serve out the best for value trades -- despite bumper annual returns (Domestic Company Total Return Index) recorded over the past 3 years: +11.1% (in 2021), +18.4% (in 2022) and +25.5% (in 2023).
Kennedy Manopolwe and Jonathan Paledi, the Heads of Investments at Vunani said this stance is accompanied by their “bubble” concerns for the banking sector, as it continues its sharp upward moves. They observed this has been by far the major driver of the Domestic Companies Index (DCI) and the Domestic Company Total Return Index (DCTRI) rally over the recent 3 years.
NB: *Year to Date being June 2024, source Vunani Fund Managers
Domestic equities have continued to exhibit momentum in share price, despite interest rate cuts (one in December 2023 and another in June 2024) which have been effected by the Bank of Botswana (BoB). The Monetary Policy Committee (MPC) of the Bank of Botswana reduced the Monetary Policy Rate (MoPR) by 25 basis points from 2.15% to 1.9%, citing contained inflation and motive to support economic growth. The rate cut followed two others of the same magnitude in December 2023 and June 2024.
Manopolwe and Paledi warned that this policy positioning could be negative for the significantly weighted banking sector in the medium to long term, as their interest rate margins could be affected. Generally, banks are expected to reduce lending rates in line with reduced benchmark rates which would consequently compress their interest income margins.
A surge in the banking sector in the past year led equity gains as the industry responded to the hawkish interest rate cycle post-pandemic which triggered inflation to record highs. Good earnings and yield provided impetus to the equity bubble in the past year.
Furthermore, with pension funds rebalancing to comply with the new prudential fund limits, Manopolwe and Paledi see "this cash on the sidelines being also accountable to a certain extent to the elevated and dislocated pricing".
Around the world, most central banks are leaning towards lowering interest rates reflecting inflation expectations. Global inflation is projected to drop to 5.9% this year from 6.8% in 2023, and further decrease to 4.5% by 2025. The trend is for inflation to go down and the market would expect central banks to tilt towards cutting rates to support growth, thus impacting on interest margins of lenders as borrowing becomes cheaper.
Banks expect higher profit
But banks have issued cautionaries to the effect that their profits will be better. First National Bank Botswana (FNB) told its shareholders that the overall profit before tax for the period ended 30 June 2024 will be higher than that reported in the previous corresponding period by between 20% and 30%. In number terms, this is an increase of between P284 million and P426 million. The profit before tax for the corresponding period ended 30 June 2023 was P1.4 billion. FNB Botswana is the largest counter by market capitalisation on the Botswana Stock Exchange (BSE) at P12.5 billion followed by Absa Bank in the banking sector at P5.6 billion.
Absa also expects its condensed consolidated interim results for the period ended 30 June 2024 to be higher than those reported for the 6-month period ended 30 June 2023. Profit before tax is expected to be higher, by between 20 – 30%, (approximately P90 million to P134 million) than that reported for the 6-month period ended 30 June 2023, which amounted to P448 million.
Access Bank Botswana Plc advised shareholders that the Group’s profit before tax for the period ended 30th June 2024 will be 230% to 240% (approximately P41 million to P43 million) higher than the profit for the period ending 30th June 2023 of P18 million. Stanbic Bank Botswana Limited expects profit before tax for the half year ended 30 June 2024 to be between 40% and 50% higher than that reported for the comparative half year ended 30 June 2023. This translates to an increase of between P116 million and P145 million. The profit before tax for the half year ended 30 June 2023 was P290 million.
DCI appreciates 7.3%
With banks having led some phases of equity gains, other sectors are expected to come into play. During the period 1 January to 31 July 2024, the DCI appreciated by 7.3% in comparison to an increase of 7.1% during the corresponding period in 2023, according to the BSE Market Report. The Domestic Company Total Return Index (DCTRI) appreciated by 13.6% in comparison to an increase of 12.8% during the corresponding period in 2023. The Foreign Company Index (FCI) registered a notable increase of 19.7% in comparison to a marginal appreciation of 0.1% in the corresponding period in 2023.
The top 3 traded companies during the period under review were Sechaba (P183.5 million), Access (P136.1 million) and CA Sales (P90.1 million), according to the BSE. More than 56% of the listed companies have experienced share price appreciation, thus supporting the growth in both the DCI and the FCI, BSE said.
Source: Botswana Stock Exchange – BSE; VFM, Vunani
“Taking a valuation snapshot of both bonds and equities, utilising the ‘Fed Model’, originally developed for the US market, it does reflect a significant narrowing gap between earnings yield and bond yield,” Manopolwe and Paledi said. In their view, on an overall basis, the local stock market is more on the expensive side given how much it has moved in a relatively short period and also indicating potential headwinds to its upward rise.
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