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South Africa: Despair on Monday, Hope on Tuesday

Jun 27, 2024 | General, Industry Trends, Latest News, Market & The Economy | 1 comment

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As Alan Paton said in 1985, “South Africa is a place where you despair on Monday and hope on Tuesday.”

At Veritas, we prefer to steer clear of politics in general, but since the recent election results are critical to our clients’ portfolios and lifestyles, we thought we would unpack what our research partner, Fundhouse, describes as potentially “one of the most significant shifts in the South African investment case since the 90s”.

The election outcome includes the expected (the ANC losing its majority for the first time since 1994) and the unexpected (an ANC and Democratic Alliance-led Government of National Unity, or GNU, being formed). So far, the result has been a positive surprise for many investors.

Currently, three other political parties (the Inkatha Freedom Party, the Patriotic Alliance and the GOOD Party) join the ANC and the DA in the governing collation. Collectively, the five parties hold 68%, or 273, of the 400 seats in the National Assembly.

In an opinion piece about the elections, the independent political and economic analyst, JP Landman, makes the interesting point that “some things that did not happen during this election season are as important as those that did”, notably that the ANC “did not cling to power and refuse to accept the result”.

We agree with Landman when he says that the importance of this cannot be over-emphasised. “It was a seminal moment” he says, “For 30 years people have said the real test for our democracy would be when the ANC lost power. Well, it did lose power and almost seamlessly moved to a new dispensation within 2 weeks.”

Clearly, there is still a fair amount of uncertainty, but let us focus on what we do know (with help from Fundhouse’s summary of events).

The ANC, South Africa’s only ruling party in the democratic era, looks set to pull off a stable transition to a new political regime.  In the process, a new cohort of far-left, populist political parties – the Economic Freedom Fighters (EFF) and uMkhonto weSizwe (MK) – have assumed the mantle of the opposition.

The fact that the GNU consists of both the DA and the ANC indicates that these parties will align around moderate, centrist values that uphold the country’s constitutional democracy. But let us not forget that the new government has inherited the old problems, including very high levels of fiscal debt, low GDP growth, high levels of unemployment and inequality.
To understand how asset managers have been factoring all of this into portfolios, let’s look at four potential governance scenarios that were in focus before the election:

Scenario 1 – Status Quo and the Slow Grind: Many funds were positioned for this. The ANC loses its majority narrowly and enters into an agreement with a smaller party, largely maintaining the status quo. A flat to net negative market reaction would be expected over the long term, with fund managers running high offshore exposure.

Scenario 2 – The Double Dip: The ANC loses its majority by a bigger margin and enters into a coalition with the EFF, meaning a similar although less market-friendly regime. A negative market reaction would be expected.

Scenario 3 – The Big Dip: The ANC loses a significant amount of its supporter base to the far left and enters into a coalition with the MK Party and the EFF. Expectations for more radical and less constitutionally friendly policies and very negative response from markets initially and over the long term.

Some funds positioned aggressively against scenarios 3 and 4 as a ‘tail risk’, with maximum offshore exposure.

Scenario 4 – The Long Walk to Recovery: The ANC loses a significant share of its majority, enters into a coalition with the DA and other business-friendly parties, and implements market-friendly policies. Only a handful of funds positioned for this scenario, guided by low domestic valuations rather than spot forecasts on the election outcome. Expectations for a positive initial market response have materialised, with forecasts that this will continue over the long term.

Many managers had adopted a ‘wait-and-see approach’, typically erring on the side of caution, positioning for some combination of the first three scenarios. This can be seen to an extent in the general direction of South Africa’s 10-year bond yields over the last year.

Clearly, Scenario 4, until recently considered something of an outlier event, is crystalising, delivering a positive shock to markets. The ZAR/USD exchange rate broke through the R18/$ mark, stocks listed on the JSE and linked to the South African economy have rallied, and bond yields have declined, indicating an improvement in investor sentiment around domestic risk, thereby reducing government borrowing costs.

The past decade has been tough for SA investors and leading up to the elections SA valuations across a range of assets have been at very low levels. If the GNU operates well, the opportunity facing SA investors could be material, coming off a low base. However, there is still a lot of ground to cover to increase economic growth and fundamentally change South Africa’s investment case.

Landman says the way forward on economic policy seems clear. He noted that President Ramaphosa had committed the 7th administration to the continued implementation of the Vulindlela programme, which is supported by the DA. Vulindlela, an initiative started by the Presidency and National Treasury when Tito Mboweni was Minister of Finance, has scored some significant wins, including on spectrum release, electricity reform, visa reforms and the opening up of railways and ports to private sector investment.

He also pointed to research published by the Bureau for Economic Research at Stellenbosch (BER): “The researchers addressed how South Africa can move from a 1.5% growth economy to a 3.5% economy. BER concluded that we don’t need new initiatives or new policies – just implementation of the Vulindlela projects. At 1.5%, the economy is growing slower than the population – ie we are getting poorer. At 3.5%, we will grow the economy at almost twice the speed of the population. That is what happened in the first 20 years of democracy.”

It is clear that with ‘Ramaphoria’ in our recent memories, more evidence of progress will be required before the South African investment case really turns a corner. In the meantime, the risk/return equation for local investments may have reached a tipping point, which is good news for investors relying on domestic assets for returns.

The good news is certainly not limited to the investment world. As Landman notes: “On matters of economics, this coalition is very good news for the country. It reinforces a strong middle for rational economic policies … at the same time, transformation will be ongoing and will not be terminated by the coalition. Growth and more inclusion will go hand in hand.”

Although risk does remain, this could be the start of something special for SA investors.


1 Comment

  1. CJ Moll

    That was a good read .


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