A London view: SA favourite contrarian bet for stocks

By Ben Bartenstein and George Lei

(Bloomberg) – Oliver Bell says a recent breakfast with South African President Cyril Ramaphosa, a close ally of Nelson Mandela, sold him on betting on Africa’s No. 2 economy.

The London-based money manager at T. Rowe Price Group Inc. said that Ramaphosa, fresh off an electoral win, will help turn the tide after what Bell calls “a decade low” for investor sentiment and economic stability amid rampant political corruption.

“I’m very overweight,” he said in an interview in New York. “It’s set up where if you can surprise positively – sort out Eskom, put corrupt people in prison and drive a reform agenda – there could be quite a big upswing there.”

While Bell said he’s still waiting for his South Africa bet to fully pay off, his Africa and Middle East fund has topped 87% of peers in the past year, data compiled by Bloomberg show.

Bell says South Africa bulls could be set up for big outperformance considering that domestic funds are largely invested outside the nation and most foreign investors are underweight. He sees value in all sectors tied to the domestic economy – banks, retail and domestic industrial companies.

Here’s what else he had to say about emerging markets:

  • Argentine President Mauricio Macri will probably win reelection, meaning there’s a “huge amount of upside” in the nation’s assets. The trouble is Argentina gets caught up in every big emerging-market currency sell-off, which impacts inflation and feeds into the presidential polls. The 20% chance that Cristina Fernandez de Kirchner comes back, which would mean “capital controls and defaults,” is also a problem.
  • After US President Donald Trump’s latest trade threats against China and Mexico, Vietnam could be next at risk given its trade surplus with the US. Still, Trump might turn a blind eye considering the historical relationship between the two countries, he said. Bell’s heavily positioned in Vietnam, especially bank and consumer stocks. “It’s a well-loved and well-positioned story.”
  • Bell said he’s completely out of Kenya, while he likes Nigeria. “In Kenya, we’re worried about a currency that hasn’t moved for a long time, talk of a fairly major drought, interest rate cuts from the banks and a disconnect between quite strong growth and companies going bust.” “It just makes me suspicious. I can’t explain the disconnect and it worries me.” Nigerian valuations are “extremely cheap” in dollar terms.
  • “We feel the time is approaching where international equities should start outperforming US equities.” Dollar strength has been driven by an interest rate differential between the US and the rest of the world, so a scenario of Federal Reserve cuts and no US recession could change the calculus, according to Bell.