JSE prices in a doomsday coalition

The South African stock market is pricing in a bad election outcome that is likely to see money flood out of the country and the value of the rand plummet. 

This is feedback from John Biccard, portfolio manager of Ninety One’s Value Fund, who told Business Day TV that the market is expecting the ANC to partner with other left-leaning political parties, resulting in a shift towards stronger anti-business policies. 

Biccard said South African equities are coming off the back of a lost decade, with returns significantly underperforming their emerging market peers and developed markets. 

South African equities have been weighed down by state capture, load-shedding, rising sovereign debt, failing infrastructure, and heightened crime levels. 

Biccard said this has resulted in a lot of bad news being priced into local stocks, making them attractively valued. 

None of these issues is likely to be resolved quickly, and they are only compounded by the rising uncertainty surrounding the country’s national election at the end of May. 

The ANC is set to lose its majority for the first time since 1994, with the great unknown being what kind of coalition will govern the country following the election. 

This spike in political uncertainty comes at the end of a “lost decade” for South African stocks, with lots of bad news priced into their valuations. 

Biccard said currently, according to the valuations of local shares, the market is pricing in a bad outcome for businesses. 

Investors appear to be pricing in a scenario in which the ANC’s support drops to around 40% after the 29 May vote, leading it to tie up with the EFF, or uMkhonto weSizwe Party.

Both parties favour nationalising the central bank and land expropriation without compensation.

Biccard said the valuation and positioning that investors have taken on the country’s locally focused stocks indicate that the market is 80% sure of such an outcome. 

However, this does not mean that an ANC-EFF coalition is a foregone conclusion, and Biccard said that the probability of such a coalition is most likely lower than what the market expects. 

“It is difficult to see probabilities of these two events to be high enough to match the market’s expectations,” he said. 

“Consequently, our entire domestic equity positioning in the Ninety One Value Fund — outside of 35% offshore and 10% in gold shares — is invested in ‘SA Inc.’”

Ninety One sees a 50% probability that the ANC will get less than 40% of the vote and a 20% chance that it would then partner with the EFF or former President Jacob Zuma’s MKP.

“We therefore see the probability of a bad outcome as only 10%, a stark contrast to what the market appears to be pricing in.”


Top JSE indices