Investors remained underweight on South African stocks even after the African National Congress\u2019s victory in this month\u2019s elections, signalling scepticism about the prospect for economic reform, Morgan Stanley said.<\/p>\n
The nation\u2019s stocks have attractive valuations, according to the bank\u2019s 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 stabilisation.<\/p>\n
\u201cInvestors will now view South African equities as a \u2018show me\u2019 story around economic reform implementation, given investors\u2019 initial optimism and then disappointment on South Africa\u2019s recovery last year and the slower than expected pace of reform implementation in Brazil more recently,\u201d Morgan Stanley said in a note to clients dated 14 May.<\/p>\n
Investors are awaiting news on the government\u2019s new cabinet, a likely reduction in the number of ministries, the restructuring of power utility Eskom, and clarity around land reform. The market will also be eyeing efforts to reduce the country\u2019s 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.<\/p>\n
\u201cA 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,\u201d Morgan Stanley said.<\/p>\n
\u201cThe focus will turn to actual implementation of structural economic reforms.\u201d<\/p>\n
Morgan Stanley expects the election results to buoy South Africa\u2019s macroeconomic and reform prospects, and recently picked the following companies as best placed to expand their margins over the next two years:<\/p>\n
The strategists also see attractive fundamentals in diversified miners, the platinum sector, and Sasol in the medium- to long-term.<\/p>\n