(Bloomberg) -- RMB Morgan Stanley sees South African equities delivering returns that will outperform those for cash and bonds as expected interest-rate cuts and reduced rolling blackouts support earnings growth.
South Africa’s prospects “are promising” as stocks could yield 18% over the next year, outperforming an estimated return of 13% for local bonds and 8% for cash, Morgan Stanley strategist Mary Curtis wrote in a note.
An energy crisis and the collapse of rail, ports and other infrastructure — exacerbated by years of poor governance — have hamstrung Africa’s most industrialized economy. Gross domestic product expanded by an average of less than 1% over the past decade — less than needed to cut a 32.9% unemployment rate, one of the world’s highest.
President Cyril Ramaphosa has said his new multi-party administration will prioritize economic growth by tackling structural reform, fixing badly run municipalities and ramping up infrastructure investment. The government will turn South Africa into a “construction site,” he said July 18 in his first policy speech since May’s election failed to produce an outright winner.
In another potential boost to the economy, central bank policymakers held the nation’s benchmark interest rate at a 15-year high of 8.25% last week in a split decision, which could signal a shift toward easing later this year.
Morgan Stanley expects the South African Reserve Bank to cut its key rate by 25 basis points when it next meets in September. Coupled with its view that economic growth will accelerate to 1.9% in 2025 and that the US will start easing policy, “the stage is set” for improvement in equities, Curtis said.
South African stocks are trading at almost 11 times estimated earnings, a 17% discount to the 10-year average, while bond yields have eased but remain about 185 basis points above their average over the past 10 years, analysts including Curtis wrote in a note.
Morgan Stanley favors companies such as lender FirstRand Ltd., health insurer Discovery Ltd., manufacturer and distributor Bidvest Group Ltd. and hospital operator Life Healthcare Group Holdings Ltd.
Other picks include Aspen Pharmacare Holdings Ltd., paper producer Sappi Ltd., internet-technology investor Prosus NV, beverage maker Anheuser-Busch InBev SA/NV, and telecommunications provider Vodacom Group Ltd.
In mining, it prefers African Rainbow Minerals Ltd. and Northam Platinum Holdings Ltd.
For banks, “the outlook from here is better,” analyst James Starke wrote in the note. “Falling inflation and lower interest rates should support affordability and there is a reasonable chance of recovery in business confidence with the election uncertainty out of the way and the significant improvement in loadshedding,” he said, using a local term for rolling blackouts.
Over the past three months, the rand has appreciated 4.1% against the dollar, while the country’s bonds and the FTSE/Africa All Share stocks gauge have both rallied 13% in US-currency terms. The MSCI World Equity Index has risen 8%, while the WGBI Global Government Bond Index has climbed 2.2%
“South African assets have rallied significantly over the past three months but the country’s equities still have some way to go to catch up with the performance of global benchmarks year to date,” Curtis wrote.
Sign up here for the twice-weekly Next Africa newsletter
--With assistance from James Cone.
©2024 Bloomberg L.P.