Kagiso Buys Into South African Banks Despite Low Economic Growth

Investment management firm, Kagiso Asset Management defied South Africa’s low economic growth dynamics to invest in Standard Bank and FirstRand, acquiring 8 percent and 7.9 percent stakes respectively.  “The macro-headwinds that the economy is currently facing would ordinarily present an argument against holding banks,” Chief Investment Officer of Kagiso Asset Management, Gavin Wood said recently.  He added however that the situation presents an opportunity, as prices of stocks are low.

South Africa’s economy has been hardly hit over the past few years, with corruption and incessant union strikes in its critical mining sector dealing a big blow on investments.  The International Monetary Fund (IMF) believes the country’s economy will improve in 2014, according to a forecast in its World Economic Outlook (WEO) report.  The growth is however not significant by South African standards. IMF predicts a 2.8 percent GDP growth for the Southern African country, up from its 1.8 percent in 2013.

Proving further that Kagiso made a wise investment, Wood noted that South Africa is currently facing a rising interest rate cycle, but regards it as a positive driver of return on equity (ROE) for the banks.  “They get more in than they pay out, and the result is a ROE uplift for the banks – it’s a real earnings driver,” said Wood, who noted however that a sharp rise in interest rate might cause severe credit losses.

Explaining the investment firm’s choice of Standard Bank and FirstRand, Wood said the asset management firm likes Standard Bank for its strength in Africa and FirstRand for its operational momentum.  He also expressed said African economies would be the fastest growing in the world for decades to come.

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