Skeptical Investors Light on South African Stocks After Election

(Bloomberg) -- Investors remained underweight on South African stocks even after the African National Congress’s victory in this month’s elections, signaling skepticism about the prospect for economic reform, Morgan Stanley said.

The nation’s stocks have attractive valuations, according to the bank’s strategists, Marina Zavolock and Regiane Yamanari, who upgraded South Africa to overweight in March, citing depressed valuations, oversold technicals, low investor expectations, and other signals pointing to stabilization.

“Investors will now view South African equities as a ‘show me’ story around economic reform implementation, given investors’ initial optimism and then disappointment on South Africa’s recovery last year and the slower than expected pace of reform implementation in Brazil more recently,” Morgan Stanley said in a note to clients dated May 14.

Investors are awaiting news on the government’s new cabinet, a likely reduction in the number of ministries, the restructuring of power utility Eskom Holdings SOC Ltd., and clarity around land reform. The market will also be eyeing efforts to reduce the country’s wage bill, which could see the departure of as many as 30,000 public servants, as well as plans to improve the cost and the ease of doing business.

“A lot has already been done to improve the regulatory and governance foundation laying the groundwork for increased economic reform and we feel that these underlying improvements are generally under-appreciated by the market,” Morgan Stanley said. “The focus will turn to actual implementation of structural economic reforms.”

Morgan Stanley expects the election results to buoy South Africa’s macroeconomic and reform prospects, and recently picked FirstRand Ltd., Capitec Bank Holdings Ltd., Standard Bank Group Ltd., Tiger Brands Ltd., Pick n Pay Stores Ltd., Dis-Chem Pharmacies Ltd., Anglo American Plc and Glencore Plc as some of the companies best placed to expand their margins over the next two years. The strategists also see attractive fundamentals in diversified miners, the platinum sector, and Sasol Ltd. in the medium- to long-term.

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, Jon Menon, Paul Jarvis

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