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South Africans are gearing up to go to the polls again in May. In past elections, an ANC victory had always been a relative certainty, so investors could expect little change in the political environment. However, this is no longer a foregone conclusion, as the 2024 election is set to be the most tightly contested since the advent of democracy in 1994. What are the various scenarios that could play out, and what is their potential impact on local financial markets?

Polling data suggest that the ANC will likely lose its outright majority (more than 50% of the vote) in the upcoming election, forcing it to form a coalition to retain power. The range of probable outcomes is broader than in the past, but the ruling party is expected to secure between 42% and 50% of the vote. Within this range, there are a few different scenarios, each presenting its own opportunity set. 

Historically, the ANC has outperformed in national ballots compared to prior municipal elections, and it notched 45.6% in the last local government election. Our base case is that the party will garner 45-48% of the vote and will therefore need to form a coalition with a small party, potentially the IFP, to retain power – but it won’t have to make major concessions. In this scenario, we expect South Africa to continue muddling along, achieving below-potential growth with some progress around loadshedding and inefficiencies at our country’s ports over time, but no rapid economic improvement. 

The key unknown is the rise of former President Jacob Zuma’s MK party – its recent arrival on the electoral scene renders much of the polling data from late 2023 a bit stale. There is little clarity on the newcomer party’s ability to mobilise voters on election day, which is a far larger undertaking than getting good numbers in a by-election. While some polls point to MK taking 10% of the vote, we think the party will achieve in the region of 4-8%. From an investment perspective, the vital variable is whether MK’s votes will come at the expense of the ANC – or the EFF. 

As recent history has shown, South Africa tends to struggle with coalition governments at provincial level, which means that the larger the ANC coalition partner’s share of the vote, the more volatile the local political landscape is likely to be. Given the government’s struggles to deliver services under the ANC’s leadership, the added distraction of party infighting within a coalition would likely result in further deterioration in government execution. 

From a local stock market perspective, the most significant risk is therefore a scenario in which the ANC is at the bottom of the 42-50% range and has to make meaningful concessions to other parties in a coalition government. The higher the ANC’s share of the vote, the better it is likely to be for local share prices. 

Short-Term Disruptor

Elections and the media frenzy around them often lead us to think that this is all that drives our fragile currency and our stock and bond markets. However, we remind readers that elections tend to be a short-term disruptor. In our view, the global economic cycle is far more relevant to the broader South African economy than is local politics. This is particularly true for long-term investors such as ourselves.

At Sanlam Private Wealth, we always aim to have our clients’ portfolios positioned to deliver the best long-term performance while also ensuring that we don’t take inappropriate amounts of risk. At the same time, we’re always on the lookout for fresh opportunities, which the election noise may create over the short term.

With regard to the rand, it appears to be pricing in both the global cycle and South Africa’s various structural issues around electricity, ports and rail. However, there appears to be very little political risk premium in the exchange rate at the moment. As the elections approach and the news flow around political promises ramps up, the potential for additional risk premium to be baked into the currency will likely increase. 

Attractive Prices

Where we are seeing some risk premium around the elections is in the price of South African equities, which are currently cheap relative to both their own history and emerging markets in general. At a high level, the price of the local market is looking interesting to us. 

There appears to be a dearth of buyers for so-called SA Inc stocks (companies that generate most of their revenue locally) at the moment. This is evident in the undemanding valuation multiples of both large-cap players such as banks and higher-beta sectors like clothing retail. We suspect that potential buyers of shares of many South African-focused businesses are sitting on the sidelines waiting for the greater level of certainty that will follow the elections. 

In our clients’ local equity portfolios as well as the South African portions of our worldwide offerings, we are currently positioned with an overweight towards rand-hedge stocks (companies that earn most of their revenue outside the country), whose rand share prices should benefit from currency weakness associated with politics. There may come a time, however, over the coming months when share prices (and the currency) reflect excess risk. Should this situation arise, we would look to take advantage of attractive prices to increase our holdings in SA-focused businesses. DM/BM

By David Lerche, Chief Investment Officer


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