South African investments can soar under new government

South African stocks and bonds experienced a “relief rally” following the elections, and while optimism has moderated slightly, positive moves from the new government could see local assets soar.

This is the view of Efficient Group chief economist Dawie Roodt, who told The Money Show that there’s a lot of excitement in the markets. 

“I think there was a bit of a relief rally because before the elections, the financial markets were under quite a lot of stress,” he said. 

Before the elections, many expected that the ANC would lose its majority and be forced to join a coalition with opposition parties to remain in power.

However, there was a lot of uncertainty surrounding who this partner will be, with many dreading a more left-leaning coalition with the EFF and MK Party.

Roodt said these concerns weighed on South Africa’s stock markets, currency, and bonds.

When the ANC announced that it would be forming a government of national unity (GNU), many praised this decision as a positive move for the country.

“So I think there was a relief rally but I also think what we have seen is a bit of an optimistic rally as well,” Roodt said. 

This is especially true if you look at the bond and equity markets, which rallied following the formation of the GNU.

The rand also skyrocketed following the announcement, breaking through R18/USD for the first time in months.

While this has moderated slightly since the announcement, Roodt said South African assets could perform very well under the GNU – if it makes the right decisions.

“What will determine how the market’s gonna react is if the new government comes out with all guns blazing and they put all the right things in place,” he said. 

He said this would allow the rand to fall to R17.50/USD or even R17/USD. 

South Africa could easily see the equity markets run another 10% or even 20%, and the bond market run another 200 basis points. 

“All those things are certainly possible provided we get the right noises, and then we get some real action, real positive action from the new government,” Roodt said.

Good news ahead

Old Mutual Wealth investment strategist Izak Odendaal said South Africa’s political landscape underwent a significant shift in the first half of 2024, and positive developments have emerged. 

Firstly, the ANC’s acceptance of the results and their participation in coalition talks ensured a peaceful transition. 

Secondly, President Ramaphosa remained in power, providing continuity in leadership. 

Thirdly, the GNU surprised many by leaning towards centrism rather than populism.

While it remains to be seen how this new government will set aside their differences and work together over the next five years, Odendaal said economic policy will still likely move in the right direction.

This is because the new government prioritises economic growth and fiscal consolidation, and while navigating coalition politics might be challenging, there’s already progress. 

For example, Operation Vulindlela, a pre-existing initiative focused on growth obstacles, will continue its work. The recent government budget surplus also signifies a positive step towards curbing public debt.

“In other words, while the politics could be messy and uncertain, economic policy is still likely to move in the right direction, if gradually and unevenly so, raising the medium-term growth profile of the economy,” Odendaal said.

“This should support South African asset classes even if political events cause volatility, as has been the case over the past month.”

He expects Inflation to return to the target range by early 2025, aided by subdued domestic demand and easing supply-side pressures.

Lower short-term interest rates are also on the horizon, offering relief to consumers burdened by household debt.

Bond and interest rate-sensitive equity returns are likely to benefit from these potential interest rate cuts and economic improvement. 

With attractive valuations compared to historical data and other emerging markets, South African assets hold the potential for above-average returns in the coming years.