South African election ‘unsettling’ but full of opportunities – Allan Gray

While the national elections at the end of the month have introduced significant uncertainty to financial markets, investors should remember that they are not the main driver behind stock market returns and actually present unique opportunities. 

This is feedback from Marise Bester, an investment specialist at Allan Gray, who urged investors not to try to predict the outcome of the election or time the market. 

“In our view, the year 2024 has above-average political risk,” she said. “The uncertainty about the upcoming election is unsettling, but also positive, as it’s a true reflection of a healthy democracy.”

Bester explained that elections tend to strongly affect the performance of the JSE but only for a short time before other factors, such as company earnings, cash flow, and the business environment, take over again. 

Looking at the performance of the JSE All Share Index (ALSI) over the past 30 years, there have only been five years in which the index reported a negative return – 1997, 1998, 2002, 2008 and 2018. 

“None of these years coincided with a general election,” Bester noted. “Markets are cyclical, and short-term volatility also leads to fluctuating returns with no clear pattern, even during repeat events such as election years.”

However, she said that this is not a typical election cycle as the outcome of this election could drastically change the country’s economic policy. 

“The outcome of the May election could drastically change many policies that could affect companies in different ways. But the same was true in 1994, and the ALSI achieved a return of 23% that year.”

Despite the market shocks and rebounds, local equities have grown by 13% per annum over the past three decades, underscoring the importance of focusing on the longer-term.

While short-term fluctuations are likely to occur around the election, history suggests that the long-term trajectory of the market is driven by broader economic factors and company fundamentals.

“History has also taught us that investors who have endured the tough periods and adopted a longer-term view at the most uncomfortable of times tend to be rewarded for their patience.”

Investors should focus on what is within their control rather than what is not. “What we can control is how we react both in the run-up to and after the election, keeping our emotions in check,” she said. 

“This has been illustrated over time by investors switching out of equities into cash during times of uncertainty, often locking in losses.”

South African assets primed for rally

In a Bloomberg survey of 26 emerging-market investors, most were overweight or neutral on South Africa and said they preferred the country over investing in Egypt or Nigeria. 

“The election uncertainty has been weighing on South Africa, so an outcome that rules out a populist government would be received well by the market,” said Kaan Nazli, a portfolio manager at Neuberger Berman Asset Management.

A favourable outcome would also allow the government to focus on structural reforms to unlock economic growth, he said.

Almost two-thirds of respondents said they’d be most likely to increase exposure to South Africa if the election results in a coalition between the ANC and the official opposition Democratic Alliance, while 19% said they would do so if the ANC won outright, but with a reduced majority.

More than 90% of respondents said they expect assets to rally in the event of an election outcome that ensures policy continuity.

“If the election turns out reasonably, you could see quite a bit of foreign buying coming into our markets,” said Peter Armitage, CEO of Anchor Capital.

The Johannesburg-based money manager said he became more bullish on South African stocks about two months ago, and has bought “quite heavily” into banks, as well as retailers including Shoprite and some real estate firms.

To be sure, investors were quick to point out that any rally would be short-lived unless the new government made some dramatic reforms.