BROKERS’ NOTES: Buy Old Mutual, take profit from banks

Chantal Marx, head of investment research and content: FNB Wealth & Investments

Buy: Old Mutual

Old Mutual has benefited from the South Africa Inc rally recently but is still a major underperformer relative to its peers this year. The stock is 8% below where it started 2024, while competitors have performed well in the first six months. The stock trades at a sizeable discount to the sector that has widened since the start of the year.

In its first-quarter business update, released at the end of May, Old Mutual showed strong new business growth in life insurance, countered by continued pressure in the rest-of-Africa business, which was affected by currency devaluations. The company is looking to exit subscale operations across the continent and currencies seem to have stabilised more recently.

The price recently crossed its 200-day moving average, suggesting a change in sentiment to bullish, and this level could offer future support. Our entry range is R12-R13, with an upside target of R14, or 16.8% above current levels. We recommend a stop loss at R11.

Take profit: South African banks, except Capitec

Recent price appreciation has been rapid, driven by the announcement of the government of national unity (GNU), which pushed South Africa Inc stocks higher and resulted in a strong rally in local bonds. The sharp increase in share prices has led to overbought conditions. We would expect broad profit-taking by short-term investors — particularly as the cabinet announcement looms and conflict between parties involved in the GNU plays out in the media. The correction may be temporary, but could provide a healthier foundation for future gains.

We see the same scenario playing out in the higher-quality retailers, but note that these stocks have more near-term earnings support, with the banks perhaps vulnerable to a deterioration in credit conditions (higher impairments into this half), the absence of interest rate hikes to support net interest income, and constraints on transactional income.

We would be interested in re-entering a position in South African banks at about 10% below current levels.