While today’s 25 basis point cut is unlikely to have a significant impact on the economy in the very short to medium term, it can play an important role in changing expectations and sentiment about the future. Depressed business, consumer and investor confidence have hampered investment into our local economy, job creation and a potential economic recovery. This lack of confidence negatively impacts earnings expectations of stocks focused on the domestic economy and an improvement in sentiment could signal renewed interest in ‘SA Inc’.
At current valuations, we believe certain domestically-orientated companies offer an excellent long-term opportunity for investors with a medium to long term horizon. However, against the backdrop of continued political and regulatory uncertainty, careful stock selection remains key. We see opportunity in companies that are exhibiting improving earnings revisions profiles due to operationally-driven improvements or self-help measures, including Absa Group, Mr Price, Sanlam and Standard Bank Group.
We consider the 25 basis point cut as a good, albeit small, step in the right direction to enhance sentiment and restore confidence. However, a number of structural concerns remain which will take time to resolve and structurally improve our domestic economic trajectory.