Please note this article covers a developing story, and as such will be tweaked on 5 June 2024 to ensure that it is accurate at the intended time of transmission to your clients.

Investors pin their hopes on an investor-friendly outcome

A lot has been written about the potential impact of elections on financial markets, but the reality is that it is exceptionally hard to predict how investors will respond to election results, particularly when they are potential game-changers.

South Africa’s election is the country’s most significant in the three decades since the end of apartheid. You would usually expect investors to be wary ahead of an election in which the ANC could lose its majority and possibly team up with the EFF.

Instead, foreigners invested heavily in the bond market for the first time in years, and a week before the elections, the rand firmed to its strongest level of R18.07 to the dollar in ten months. The rand and the stock market lost some ground ahead of election day on a shift in global investor sentiment rather than South African investor nerves.

What can investors expect?

Investec Wealth & Investment did some interesting analysis of the different scenarios and their likely impact on the economy and markets.

Most likely scenario – ANC loses its majority (42% to 49%)

The closer the vote is to 49%, the better the outlook for the economy and financial markets will be because the ANC will be able to establish a coalition that doesn’t rock the boat. Investec foresees a coalition with the DA being favourable for financial markets, though it will require some concessions in the cabinet and parliament. Positives would be that the structural reform programme would remain intact, and there would be continued fiscal prudency, policy certainty, and institutional independence.

If the vote comes in at the lower end of the scale, the party will need more coalition partners, which risks changing the policy agenda. If there’s anything investors hate, it’s political upheaval and changing goalposts. Investors will want to see the new government remain committed to rolling out existing policy plans in critical economic segments, such as energy, crime, and logistics.

As long as the ANC remains the main driver of policy, possibly with some concessions, Investec sees the election outcome as positive for equities, bonds and the rand, albeit with some short-term volatility.

Worst case scenario – ANC gets less than 42% and teams up with the EFF

A coalition government that includes the EFF would be negative across all asset classes because it would likely require major concessions from the ANC, including significant policy changes that result in fiscal deterioration, and these would significantly increase the country’s investment risk premium.

Least likely scenario – ANC maintains its majority

If the ANC holds onto its majority vote, Investec and other analysts expect more of the same. This would leave the structural reform programme intact and the impact on equities and bonds neutral to slightly positive.

The bottom line

South Africa’s financial markets are primarily driven by global sentiment and foreign investors typically come and go based on their risk appetite, which can change quickly. So you can expect heightened financial market volatility until the new government beds down. But that doesn’t mean that local investors should follow suit. Remember, it’s time in the market, not timing the market that generates the most wealth.

lease note this article covers a developing story, and as such will be tweaked on 5 June 2024 to ensure that it is accurate at the intended time of transmission to your clients.

Investors pin their hopes on an investor-friendly outcome

A lot has been written about the potential impact of elections on financial markets, but the reality is that it is exceptionally hard to predict how investors will respond to election results, particularly when they are potential game-changers.

South Africa’s election is the country’s most significant in the three decades since the end of apartheid. You would usually expect investors to be wary ahead of an election in which the ANC could lose its majority and possibly team up with the EFF.

Instead, foreigners invested heavily in the bond market for the first time in years, and a week before the elections, the rand firmed to its strongest level of R18.07 to the dollar in ten months. The rand and the stock market lost some ground ahead of election day on a shift in global investor sentiment rather than South African investor nerves.


What can investors expect?

Investec Wealth & Investment did some interesting analysis of the different scenarios and their likely impact on the economy and markets.


Most likely scenario – ANC loses its majority (42% to 49%)

The closer the vote is to 49%, the better the outlook for the economy and financial markets will be because the ANC will be able to establish a coalition that doesn’t rock the boat. Investec foresees a coalition with the DA being favourable for financial markets, though it will require some concessions in the cabinet and parliament. Positives would be that the structural reform programme would remain intact, and there would be continued fiscal prudency, policy certainty, and institutional independence.

If the vote comes in at the lower end of the scale, the party will need more coalition partners, which risks changing the policy agenda. If there’s anything investors hate, it’s political upheaval and changing goalposts. Investors will want to see the new government remain committed to rolling out existing policy plans in critical economic segments, such as energy, crime, and logistics.

As long as the ANC remains the main driver of policy, possibly with some concessions, Investec sees the election outcome as positive for equities, bonds and the rand, albeit with some short-term volatility.


Worst case scenario – ANC gets less than 42% and teams up with the EFF

A coalition government that includes the EFF would be negative across all asset classes because it would likely require major concessions from the ANC, including significant policy changes that result in fiscal deterioration, and these would significantly increase the country’s investment risk premium.


Least likely scenario – ANC maintains its majority

If the ANC holds onto its majority vote, Investec and other analysts expect more of the same. This would leave the structural reform programme intact and the impact on equities and bonds neutral to slightly positive.


The bottom line

South Africa’s financial markets are primarily driven by global sentiment and foreign investors typically come and go based on their risk appetite, which can change quickly. So you can expect heightened financial market volatility until the new government beds down. But that doesn’t mean that local investors should follow suit. Remember, it’s time in the market, not timing the market that generates the most wealth.

If you have absolutely any questions about your investment strategy, drop us a line.

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