Old Mutual sees opportunities in coalition government turmoil

There are significant opportunities in South Africa’s investment landscape, with a market-friendly coalition likely to unlock significant value amid improved service delivery and economic growth. 

This is feedback from Old Mutual Investment Group’s head of equities research, Meryl Pick, who said that volatility is a permanent fixture in South Africa’s markets and that investors have to work around it to find opportunities.

Pick said the formation of a Government of National Unity will herald a dramatic change to the existing status quo and has the potential to unlock massive value in local markets. 

“Maintaining the status quo may have delivered familiarity for markets, but it certainly did not deliver growth,” she said.

As an emerging market, South Africa is no stranger to uncertainty, and its investors have adapted to stomach the corresponding increase in financial volatility. 

However, uncertainty is currently far more pronounced than usual, with the ANC’s constant fixture in power no longer there. 

This has compounded the longer-term impact of low economic growth, load-shedding, and logistical inefficiencies on the valuations of South African companies, making them extremely cheap. 

“The South African market is currently as undervalued as it was during the global financial crisis, making such levels an attractive entry point with strong potential to recover sharply, should we see a more market-friendly coalition.” 

However, portfolio manager Jason Swartz urged some caution, as any sustained improvement will only come from positive reforms and economic data. 

“There are always initial market shocks that come with an election cycle. However, as expected, the market normalised once the dust settled,” Swartz said.  

This pattern is likely to repeat once South Africa has a new government. Any long-term improvements in stock market performance depend on the implementation of critical policy measures, specifically growth-enhancing reforms.

“Ultimately, what benefits the market also benefits the people, and vice versa. It, therefore, does matter not what the label of the new government is as long as it is structured to deliver on these requirements,” Pick said.

Head of equities research at Old Mutual Investment Group, Meryl Pick

How Old Mutual is investing

Despite the current market anxiety, Pick said Old Mutual will continue to follow its positioning strategy because “the only certainty is uncertainty”.

“We see no reason to change our positioning. We are, however, hedging against tail risk events and any potential significant currency movements using derivates,” he added.

Old Mutual has maintained a neutral position in South African equities and an underweight position in global equities. 

Swartz explained that the upcoming US elections later in the year also posed significant uncertainty for the local market due to economic policies impacting global trade and inflation.

They also pointed out the globalised nature of the JSE, noting that approximately 75% of earnings come from international markets, while the remaining 25% comes from Africa. 

For example, as a commodity-based market, developments in China can have a substantially larger impact on our market than local events.

Swartz did warn, however, that a left-leaning, state-centric approach with an expanded social state and prescription of retirement assets could pose challenges to economic and market growth.

While there is consensus on the need for job creation, the methods to achieve this differ. 

Some parties view state employment as the means to create jobs, whereas others view the private sector as the route. 

Both can work, but expanding the state’s role funded by the current tax base is unsustainable, particularly with past evidence of irregular expenditure, Swartz said.  

Up to now, the ANC government has carefully balanced social reform – social grants, affirmative action and black economic empowerment – with measures to correct our growth trajectory, such as increased private sector involvement in state-owned enterprises. “.

“Rather than viewing this as a risky time in the market, we see it as an opportunity for meaningful change. It’s a time to prioritise service delivery and unlock economic growth.” 


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