South African election uncertainty rattles investors

Risks around an election expected to be the most competitive since South Africa became a democracy in 1994 cloud the outlook for its stocks next year.

While 40 national elections are due globally in 2024, the vote in South Africa is on Bank of America Corp. strategists’ shortlist of the most market-relevant in developing countries.

Turbulence around the poll — which is yet to be scheduled — threatens to curb the benefit to Johannesburg stocks from falling interest rates and a soft landing in major economies, investors say. 

Surveys suggest the ruling African National Congress could lose its absolute majority for the first time since coming to power almost 30 years ago, potentially forcing it to find coalition partners. It’s this scenario that’s spurring the greatest unease. 

“With unknown outcomes, there is a lot of uncertainty in the system,” said Duncan Artus, chief investment officer at Allan Gray, which oversees about R566 billion from Cape Town.

“This is weighing on investor sentiment and particularly foreign participation in South African markets.” 

An election result that pushes the ANC into a coalition with the Economic Freedom Fighters, the third-largest party in the 2019 vote and a group that advocates for the nationalization of banks, mines and land, “would spook the markets,” according to Bloomberg Economist Yvonne Mhango.

BofA strategists said last month they expect “tense and competitive elections.”

Allan Gray’s Artus expects local investors to continue to proceed cautiously, favouring fixed income over equities, until there is more certainty, he said in emailed comments.

The election isn’t the only concern for South African investors. Since hitting a record high in January, the main stock index has lagged behind the emerging-markets benchmark as a 15-year-old power crisis and crumbling port and rail infrastructure increase costs for local companies and constrain economic growth. 

Those headwinds have contributed to valuations that look attractive to some. Stocks in the FTSE/Africa All-Share Index trade at 9.5 times future earnings, compared with 11.6 times for MSCI Inc.’s emerging-market index.    

“We think that the South African equity market is very cheap, with a lot of value in the globally operated but locally listed shares, as well as select sectors and stocks within South Africa itself,” said Nicholas Hops of Coronation, which oversees about R603 billion.

“Multiples are low — as are expectations — and many companies have the ability to compound their earnings going forward.”

Here are some more views from investors on the outlook for South African stocks:

Coronation’s Hops:

  • “Elections always create volatility, and we expect an increase in the amount of political noise leading up to South Africa’s 2024 national elections. Ultimately, though, the direction of the economy will have the largest impact on trading and the various sectors both in the short and the long term. South African-focused equities need a meaningful improvement in the operating conditions of the country in order to see better results.”

Ninety One’s Hannes van den Berg, co-head of South African equity and multi-asset investment:

  • “Markets don’t like uncertainty, and I think if the ruling party remains 50% and above, that’s clear what happens. But if there’s a probability — and I think a lot of polls are indicating there is a probability — that it’s lower than 50%, markets will want to know, ‘OK, what does this mean? And, how are the leaders going to deal with it.’”
  • “We think there’s an opportunity in the SA Inc. stocks — retail, banks, insurers and property companies. We also think there’s an opportunity for resources. China’s not going to be this big bang stimulus saviour that they were in 2017, but it will provide more constructive support to commodity demand into next year.

Old Mutual Investment Group fund manager Jason Swartz:

  • “Once we get closer toward seeing rate cuts, which will probably only happen toward the middle or end of the year, then there will be a lot of opportunity. And, I think probably we could quite easily then get back to those 2023 highs because earnings should have recovered by then.”
  • “The eventuality of some cuts in interest rates could see some sort of uplift to really beaten-down domestic cyclicals, like clothing and retail, those businesses that have really struggled in a poor consumer and a low-growth South African environment.”
  • “Our big underweight has been on the resources side, and that’s more just because, in terms of where we are in the cycle, we want to be defensive. We think from a commodity price perspective, we could see some downside there.”


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