The headquarters of Morgan Stanley. Picture: REUTERS
The headquarters of Morgan Stanley. Picture: REUTERS

There are dark clouds aplenty casting shadows over SA’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.

SA benefits from its relatively high trade with Asia, and is the country most closely linked with China of all those in Eastern Europe, the Middle East and Africa. SA 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 SA,” the analysts wrote as they cited factors behind a decision to upgrade their recommendation on the country to overweight from equal-weight.

Stocks traded in Johannesburg have lagged their developing-market peers in 2019, partly reflecting an exit by overseas investors. Foreigners have been net sellers of about $2.3bn 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 on Wednesday.

Morgan Stanley says investors are turning more optimistic; a recent survey indicated that foreign equity investors were 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.”