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In the investment world, all market moving factors are considered when assessing the intrinsic value of assets. Some factors are short term in nature, and while their impact on market prices may be temporarily severe (e.g. weather disruptions or natural disasters), they are not material in the multi-year time frame considered important when making valuation assessments.

There are however events, which can structurally alter the primary direction that markets will travel in, and these factors need very careful consideration. Evolving political regimes can certainly alter long-term investment outcomes and cannot be ignored, especially if political change is accompanied by a shift in government’s attitude towards the economy and the business environment. 2024 will be politically charged across the globe, with general elections taking place in at least sixty-four countries, including notables such as our very own South Africa (SA), United States of America (USA), United Kingdom, India, and Russia, as well as Taiwan, where elections were already held on 13 January 2024. 

Perhaps the most important election will occur in the USA as the Democrats seek to extend President Joe Biden’s term in office, while the Republicans, recognising the middle-American appeal of ex-President Donald Trump, are confident he can be re-elected as president for a second time. Whether the USA and the world is ready for another four years of ‘Trumpolitics’ remains to be seen, but his impact on the global conversation will undoubtedly be loud and divisive, setting the tone for political discourse elsewhere. 

In SA, with service delivery and the general trajectory of the country not being where it could or should be, the African National Congress (ANC) will be under massive pressure to secure an outright majority from the electorate. New entrants to the election space such as the uMkhonto weSizwe (MK) and Rise Mzansi, will join the established parties such as the ANC, Democratic Alliance (DA), Economic Freedom Fighters (EFF), Freedom Front Plus and Inkatha Freedom Party in the battle for the hearts and minds of the electorate.

Will the opposition parties be able to take advantage of the ANC’s weakened state, and will coalitions become a meaningful feature of the South African political landscape? Polling from various organisations, almost unanimously confirm the ANC will fall below the fifty percent threshold required for an outright national majority, with recent polls suggesting their support nationally may even fall below the forty percent level. Based on these predictions, a coalition government is almost guaranteed, but with whom will the ANC make its political home and what will this alliance mean for the business environment and the people of SA? These fascinating and vital questions will be answered after the elections on 29 May 2024. 

We see four potential election scenarios, each with their own outcome and impact on the trajectory and future prosperity of SA.

1.The Rise of the Fascists – The ANC performs poorly (below 40%) and is forced into a coalition with the EFF and possibly the MK party who act in concert. Nationalisation of private land, a populist hike in social grants and a ramp-up in business unfriendly policies, lead to a rapid decline in business confidence. Capital will exit SA at an increased pace. A currency crisis is predicted with interest rates spiking and the possibility of hyperinflation in the next few years as the cost of imported goods skyrockets. SA credit rating will be downgraded deep into junk status by all major ratings agencies, and we will lose access to western capital markets. The country will predictably become aligned with other rogue states in the world. This scenario creates conditions ripe for armed conflict and civil unrest as political and economic rivals’ clash.

2. The Polls were Wrong – In this scenario, the ANC wins an outright majority (51%) and South Africa continues on the current gradual downward trajectory, as ANC MP’s and MPL’s are emboldened by their support at the polls. ANC cadres continue to mismanage and loot the state, municipalities, and state-owned enterprises. The “good” ANC politicians are gradually side-lined, and the “bad” cohort regain full control of the party and the levers of power. This scenario is negative for the currency as the economy flatlines, capital leaves SA, bond yields rise moderately, and equities will likely be the only protection from rising structural inflation as national debt spirals to unsustainable levels. GDP per capita continues to fall and wealthy South Africans take control of their own future by living in self-contained compounds (think Steyn City) that function almost as normal, while surrounded by general dysfunction and poverty.

3. Uncomfortable Bedfellows – In this scenario, the ANC falls below the outright majority (wins 45%) and the party leadership, knowing an EFF coalition would ultimately spell the end of the ANC, proceed with a coalition with some, or all the members of the Multi-Party Coalition (IFP, FF+, Action SA, ACDP and the DA). The terms of the coalition are such that some ministerial posts are allocated to the Multi-Party Coalition with the ANC retaining the majority of the key cabinet roles. While there is a lack of trust between parties and policy implementation and decision-making is severely constrained, gradually the country edges in the right direction. State institutions are repurposed with more capable individuals and the privatisation of state assets gathers momentum. Economic growth recovers slowly, and business confidence improves. Due to some degree of policy paralysis, SA performs well below her economic potential. The rand stabilises and the government fiscus improves as tax revenue gradually increases. Government bonds deliver double-digit returns and SA equities outperform global equities over the next five years.

4. Off to the Races – In this scenario, the Multi-Party Coalition, led by the DA wins a surprising share of the polls (let’s say 40%) as the ANC (35%), weakened by the EFF and MK (25%) insurgency into their voter base, becomes a junior partner in the coalition government.  The terms of the coalition are such that all the key ministerial posts are allocated to the Multi-Party Coalition with the ANC allocated less important roles. While there are some infighting and trust issues between parties, an overwhelming sense of nation building and an urgency to recover the lost decades under the ANC, drives politicians and the civil service to realign policy and adopt a smaller but competent state structure. Free market principles are broadly adopted which leads to a rapid improvement in the economic outlook.  Business confidence rises and economic growth rates above five percent create the platform for a prosperous state which operates at close to full its economic potential. The rand strengthens to R12/US$ and the government returns to budget surpluses giving it space to improve social services. SA’s credit rating improves, and sharply higher tax revenues lead to personal and corporate tax rates declining with a significant increase in direct foreign investment. Consumers and corporations recover to excellent health. Government bonds deliver generationally high returns as the government risk premium halves and SA equities double in value in five years.

Amidst the complex landscape of global and local politics, the upcoming year of elections holds significant implications for businesses, investors and consumers. The potential scenarios outlined provide some contrasting trajectories, from heightened risk to economic prosperity, depending on the outcome. These are by no means the only possible outcomes but provide a useful framework to consider the context under which we are all likely to operate post-2024. DM/BM

Author: Paul Stewart, Managing Director, Merchant West Investments


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