Morgan Stanley Says It's Time for a Bet on South African Stocks

(Bloomberg) -- There are dark clouds aplenty casting shadows over South Africa’s economy and its equity market. But Morgan Stanley argues that the potential rewards for investors mean the country’s stocks are worth the risks.

South Africa benefits from its relatively high trade with Asia and is the country in eastern Europe, the Middle East and Africa that’s most closely linked to China, which is seen as leading a rebound in emerging markets this year, Morgan Stanley analysts Marina Zavolock, Regiane Yamanari and Mary Curtis said in a report.

“China’s recovery should filter through to South Africa,” the analysts wrote as they cited factors behind a decision to upgrade their recommendation on the country to overweight from equal-weight.

Morgan Stanley Says It's Time for a Bet on South African Stocks

Stocks traded in Johannesburg have lagged behind their developing-market peers in 2019, partly reflecting an exit by overseas investors. Foreigners have been net sellers of about $2.3 billion in South African stocks this year up to March 13, the most for this period since Bloomberg started tracking the data in 1998. Economic readings have been dismal too; the latest was a slump in business confidence to the lowest in two years, recorded Wednesday.

Morgan Stanley says investors are turning more optimistic; a recent survey indicated that foreign equity investors are more likely to add South African stocks than reduce in the next six months. While economic data remains weak, money managers’ expectations are already below consensus. What’s more, elections on May 8 could mark a turning point for performance as President Cyril Ramaphosa looks to revive an economy damaged during predecessor Jacob Zuma’s scandal-marred rule.

“The general perception is that Cyril Ramaphosa needs a decisive victory to push through structural reforms and finally remove Zuma-aligned ministers from his cabinet,” economist Andrea Masia wrote. “We agree that a strong victory would be beneficial, but do not believe that the gates of structural reform will suddenly open after the elections.”

Morgan Stanley Says It's Time for a Bet on South African Stocks

More from the analysts:

  • Further structural reform is key to the investment case in South Africa
    • Overweight sectors include diversified resources, platinum, chemicals and banks
  • Cut Qatar to underweight after it was the best performing market in 2018, with valuations and technicals still stretched
  • Czech Republic double downgraded to underweight as stocks trade at expensive valuations compared with emerging markets
  • Decisions on Qatar, Czech Republic help to fund South African upgrade
  • Upgrade Egypt to equal-weight “on structural reform upside, rising returns, and reduced risk from the country’s high twin deficit”

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