(Selheidj Kalka/Getty Images)
- Money is flowing into SA in bets that the ANC will win enough votes to avoid being forced by its left-wing coalition partners to implement less market-friendly policies.
- South African bonds absorbed the most cash in April since 2019, stocks are at 15-month highs and the rand is one of only five emerging market currencies to appreciate this year.
- For the most bullish investors, South Africa is a comeback story.
- For more financial news, visit: News24 Business Top Page.
South Africa's most important election in decades is already changing the course of the country's financial markets.
Money is flowing into the country in bets that the ANC will win enough votes to avoid being forced by its left-wing coalition partners to implement less market-friendly policies. South African bonds absorbed the most cash in April since Bloomberg began tracking the data in 2019, and that trend continued in May. The stock is at a 15-month high. The rand is one of only five emerging market currencies to appreciate this year.
For the most bullish investors, South Africa is a comeback story. Foreign investors have pulled $50 billion from the country's markets over the past decade as the country faces a crisis of confidence. Unprecedented power outages have hampered economic growth, and corruption and mismanagement have damaged investor confidence.
Peter Brook, portfolio manager at Old Mutual Investment Group, said: “Overseas equity investors are generally underweight South Africa, so the biggest risk is that a positive election result could lead to a stronger currency and a weaker share market. Both bond markets will be rerated.” “Poor positioning and cheap assets could lead to an explosive rally.”
Lessons from around the world show that elections matter. In 2023, Greece and Argentina elected pro-market leaders who introduced economic reforms. This led to strong market returns, with MSCI's Greek stock index soaring 48% that year, and Argentina's index rising 67% in dollar terms.
South African stocks have historically performed well in the month following elections, according to Goldman Sachs Group strategist Sunil Kaul and others. Strategists who favor domestic cyclicals and banks say a supportive fundamental backdrop plus “election relief” could spark a rally in domestically-focused stocks.
Derrick Msibi, CEO of Stanlib Asset Management, says South Africa certainly has a lot of work to do after years of economic mismanagement.
“People who are disappointed have the memory of an elephant,” Msibi said. “They will never forget or easily abandon their reservations and will demand compelling evidence of change.”
This time last year, President Cyril Ramaphosa's government was facing a crisis of confidence. The rand plunged to historic lows and local currency bond yields rose to their highest levels last seen during the pandemic. However, the power supply has stabilized to some extent. The government is on track to achieve a primary budget surplus for the first time in 15 years, and is on track to curb the rise in the worryingly high level of public debt.
“We expect growth to pick up, municipal bond yields to fall and the rand to remain stable,” said David Aselkov, a strategist at JPMorgan Chase & Co. “If this happens, we believe South Africa will significantly outperform emerging markets and reverse the trajectory of the past decade.”
Opinion polls show the ANC is at risk of losing its majority in the May 29 election for the first time since 1994. However, concerns that the poor performance could force him to seek alliances with left-wing parties have receded.
“Our base case remains that the ANC wins this election outright with an overall majority,” said Razia Khan, head of research at Standard Chartered Bank. “Even if that doesn't happen, we still think it's likely that we'll end up in a coalition with a relatively moderate, relatively centrist coalition partner.”
Parties likely to win the most votes outside the ANC include the official opposition Democratic Alliance, the populist Economic Freedom Fighters, and Umkhonto, the upstart party led by former president Jacob Zuma, who faces criminal charges related to corruption.・Wesizwe” is included.
UBS Group AG strategists, including Manik Narain, said domestic equities offer the best risk/return for the upcoming vote. If the ANC forms a coalition with the DA, local stocks could rise by as much as 17%.
The election premium for bonds is also falling. Local currency bonds lagged emerging markets for much of the first four months of 2024. However, bonds made it into the top 10 this quarter, delivering a 6.3% return to investors in dollar terms.
Citigroup strategists including Bhumika Gupta have turned overweight to debt, expecting fresh inflows into bonds in the coming months.
“The risk of the ANC having to work with the EFF post-election has contributed to the significant underperformance of South Africa's bond and credit markets in recent months,” said Roger Mark, emerging market debt analyst at Ninety One. Stated. “We only see this scenario as a tail risk, which is turning it increasingly constructive for the country's assets.”
Credit Agricole SA went long the rand against the US dollar in April, with a target of 18.60 rand to the dollar. The South African currency had already appreciated below that level and was trading around R18.14 on Monday morning.
Investec South Africa CEO Kumesh Moodleyria said investors should expect the upturn in state-owned enterprises to continue post-election, continued improvements in key institutions such as the Revenue Authority, and concerns about corruption. “We need to make sure that those who did so were successfully prosecuted,” he said.
“None of this is beyond the government's reach,” Moudria said. “A concerted effort to follow through is probably the first requirement for regaining confidence.”