Reality After the Elections

It has been less than a month since the announcement of the results of the national election.

Given the outcome of the ANC losing its majority for the first time in 30 years and the noticeable support that the MK party received, investors are understandably concerned about the implications going forward.

There has been ample news coverage on coalition talks and the Government of National Unity. But what does it all mean for you and your investments?

A Government of National Unity

The ANC has led the formation of a government of national unity (GNU) at a national level. The GNU currently consists of 10 parties. This helps the ANC out of its dilemma of entering into a direct coalition with its main rivals such as the DA, a move which some of its members have formally rejected along with the likes of COSATU. Some political analysts have suggested that a direct coalition between the ANC and the DA could cause an “internal rebellion” with in the ANC.

A broad, multiparty coalition or GNU reduces the ANC’s dependence on any individual political rival such as the DA, who is a key member of the GNU. This gives rise to the possibility of something called transactional politics. An example of which is opposition members of parliament (MP’s) demanding or being offered bribes to back ANC-sponsored legislation or agendas.

When viewing the top priorities of the ANC, DA, MK and EFF parties, there is a diverse range of ideological views. On the far right, the MK is seeking to radically transform the economy, redistribute land (expropriation without compensation) as well as scrapping the constitution. The far-right ideals of the EFF are already well known. With both parties combined receiving 24% of the national vote, their influence on policy decisions can’t be ignored when it comes to contentious far right agendas.

In the centre right, the DA is seeking to scrap policies such as BBEEE and cadre deployment, whilst prioritising the rule of law and upholding the constitution.

In the middle, we have the factionalised ANC with its own priorities such as implementing the National Health Insurance (NHI) and furthering radical economic transformation in an economy that is absent of growth.

With 40% of the national vote, the South African electorate have put the ANC on notice. In the absence of material progress over the next 5 years, they risk losing further voter share in the 2029 national election.

The GNU now accounts for 72% of the seats in parliament. If one were to exclude the DA, the remaining parties are one seat short of a majority. This has reduced the DA’s negotiating power and they are threatening to resign from the GNU after being offered fewer cabinet seats than desired.

As the negotiations for ministerial positions continue to unfold, and the balance of power is established in the GNU, we are likely to see considerable volatility unfolding.

Maintaining a functional government

There has already been speculation around the longevity of Ramaphosa’s second term, with the likes of ANC Secretary-General Fikile Mbalula stating that removing Ramaphosa as president of the ANC is a “no go area”. Nevertheless, instability within the ANC party remains a risk. One can only wait and see how this play out over the coming years.

One of the potential advantages of a GNU is that it encourages and to some degree, forces various parties to work together. However, a notable disadvantage is the potential for political instability. Having parties with conflicting and contradictory positions on various policy issues, can potentially lead to deadlocks on contentious issues such as passing a budget.

Given the context within the South African political landscape, maintaining a formal government at both the national and provincial level, may prove difficult.

We have seen how unsuccessful coalition governments have been at a provincial level and the detrimental effects that has had in those areas.

Will key issues be resolved in a GNU?

In a recent PSG Think Big webinar, political analyst Moeletsi Mbeki, highlighted some of the key issues that need to be resolved. South Africa is ranked the most unequal society in the world, with the highest youth unemployment rate in the world. Moeletsi advocated scrapping BBEEE which he describes as the “main cause of corruption and inefficiency in the economy”.

Citing data from the OECD, he said that salaries for the public sector in South Africa cost over 14% of GDP (the highest in the world), far above the 5% of GDP for other developing states, such as Chile and Indonesia. Reducing the public sector wage bill is an issue that has sat idle with little being done to effect any change.

Moeletsi goes on to state that government investment sits at around 14% of GDP whilst Asian countries sit at around 30% of GDP. The world average is 26% of GDP.

Some of the other issues include:

High unemployment, stagnant economic growth, poor standards of education, failing infrastructure, horrific service delivery and a high cost of living.

Two of SA’s busiest ports, Durban and Cape Town, have been ranked in the bottom 10 of the worst-performing ports in the world, with the latter ranked the lowest of the 405 surveyed by the World Bank. Will the GNU take the necessary steps to privatise failed state-owned enterprises such as Transnet?

Will a GNU be able to find agreement on contentious issues such as policies around BBEEE, reducing the bloated public sector wage bill, increasing and sustaining significantly higher fixed investment in the country, high unemployment, stagnant economic growth, and failing infrastructure?

As South Africans we remain ever hopeful, however we can be forgiven for being sceptical of how successful the GNU will be given the conflicting ideologies of various parties. As we get closer to the 2029 national election, we may also see electioneering and campaigning having a divisive effect on the GNU.

What is a reasonable expectation for a GNU?

One would ultimately need to see how the GNU plays out, but without the necessary reforms and their successful implementation, it may be compelling to expect more of the same – deteriorating financial and economic fundamentals. Perhaps to a lesser extent than under the previous majority led ANC government.

If the working relationship of the various parties within the GNU were to factionalise and breakdown, the effectiveness of the GNU could be called into question. There is therefore a reliance on the reasonableness of the GNU to act in the interest of the people and not in the interests of their own political parties or individual members.

Unfortunately, South Africa has a history of political parties prioritising their organisations at the expense of the people.

All things considered, one may argue that it is reasonable to expect conflict, disagreement, disputes and a general lack of discord within the GNU over the coming years.

We can only hope that despite ideological differences and disagreements, the GNU remains relatively stable and is able to function as it is intended.

What does this mean for my investments?

Post the election, positive sentiment has reflected on our financial markets. South African bonds have rallied by around 5%, whilst the currency (USD/ZAR) has rallied by about R1, from R19 to R18. Local financial stocks such as the banks have rallied by double digit figures.

Over the last several years, some South African assets have delivered disappointing returns as the market prices in a deteriorating economy, struggling consumers and growing uncertainty. This has led to select local assets being mispriced (too cheap).

Analysts are starting to feel more hopeful about the country’s growth outlook, and although this will take some time to come to fruition, business and consumer confidence should pick up more immediately.

Kim Silberman, Macro Economist and Fixed Income Strategist at Matrix Fund Managers.

Select managers such as 36ONE and M&G have become increasingly positive on local assets now that we have a degree of clarity around the election and the greater possibility for a positive outcome over the next 5 years.

Other managers such as Coronation see, on balance, better opportunities in offshore assets which include companies listed on the local stock market that derive all or most of their earnings from outside of the country. Examples include British American Tobacco, BHP Group, Richemont, Anglo American, Anglo Gold, Glencore, Bid Corp, Mondi, Anheuser-Busch, Sappi, Prosus, Quilter and the list goes on.

Companies that are reliant on the South African economy and consumer, or what is commonly referred to as “SA inc.” shares, are susceptible to South African centric risk factors to varying degrees. These include the banks (Standard Bank, ABSA, FirstRand, Capitec, etc), industrials such as, Bidvest, Grindrod and Barloworld. Insurers such as Santam, Old Mutual and Sanlam. Retailers such as, Mr Price, Shoprite, Clicks and Foschini etc. Should we see a successful GNU that enacts meaningful change over the coming years, stocks such as these may significantly benefit for such an environment. Particularly given how cheap they are.

As an example, a company like Standard Bank may be too cheap to ignore. Its P/E ratio, which is a way of valuing the company, is lower than it was during the height of the Global Financial Crisis in 2008/2009. Despite its reliance on the South African economy and consumer, many asset managers hold Standard Bank based on its attractive valuation.

Asset managers are responsible for shifting money between local and offshore assets within the various funds that they manage. Local balanced funds for example can hold up to 45% of the fund in direct offshore assets. Asset managers can invest a portion of the remaining 55%, in locally listed companies that derive all or most of their earning from outside of South Africa. Where there is a case for it, managers will hold local assets such as Standard Bank, where there is opportunity despite its reliance on the local economy and consumer.

At the end of 2023, the Allan Gray Balanced Fund (the largest balanced fund in South Africa) held 36.9% of the fund in direct offshore assets. However, when one considers the locally listed companies that derive all or most of their earnings from outside of South Africa, the fund actually had around 2/3rds of its exposure to offshore assets.

Local balanced funds, therefore, typically have more offshore exposure than one sees on a factsheet.

Although we hope for a positive, stable government in the form of a GNU, South Africa faces extreme challenges. We need to see economic growth, political stability and a drastic improvement in the country’s finances and infrastructure. This takes time.

Asset managers are therefore cognisant of the risk, despite the shift in sentiment. They will continue to closely monitor our fundamentals as we move forward. Asset managers will play an important role in actively allocating capital to achieve the best risk adjusted return, which may at times favour offshore assets over local assets, or vice versa. They are better placed to make these choices than most individual investors.