Allan Gray warns South African investors against Ramaphoria repeat

South African assets have appreciated strongly in recent weeks on the back of positive political developments in the country. 

However, political goodwill is not enough to drive tangible change, Allan Gray portfolio manager Thalia Petousis said. 

Petousis explained that elections around the world tend to introduce periods of heightened volatility in financial markets. 

With South Africa’s election being conducted without any major hiccups and a Government of National Unity (GNU) formed, financial markets have responded positively due to an expectation of greater certainty. 

Local bonds and equities have posted an 11% and 12% annualised year-to-date return to the end of June, respectively. 

The 20-year government bond yield has declined from a year-to-date high of 13.2% to as low as 11.9% at quarter end, reducing the cost of government funding. 

Foreign investors have bought R12.2 billion of local bonds since the election, bringing the year-to-date inflows to R22.2 billion, according to JSE data. This exceeds the R16.5 billion seen last year. 

South African stocks have also received increased interest from investors, with foreigners pumping over R9 billion into them at the end of June. 

Petousis said these are all positive signs for South Africa, reflecting “market exuberance” regarding the election results and the GNU. 

This will have benefits beyond the return on financial assets, with an appreciation in South African asset prices filtering through to the broader economy. 

“A more confident South African market and a stronger rand can also bleed into lower imported cost inflation and therefore has the potential to ease inflationary pressures from fuel and certain food items.” 

“As such, the local market now prices for two to three interest rate cuts over the next two years,” said Petousis.

Looking back, market exuberance following Cyril Ramaphosa’s election as president of the ANC in 2017 saw a similar move in bonds. 

Ramaphoria, as the period came to be known, saw the 20-year bond spread versus US Treasuries decline from 725 basis points (bps) to 560bps or roughly a 13% capital return over just three months.

“Currently, the 20-year spread is at 716bps versus US Treasuries, reflecting that South African bonds are, in fact, cheaper now than they were pre-Ramaphoria.” 

This is largely due to South Africa’s significantly inflated debt load and more severe interest service burden.

“Casting one’s eye one year forward from Ramaphoria to December 2018, yields were again wider, and the capital gain versus pre-Ramaphoria collapsed to just 3%, with the rand weaker alongside it.” 

“A lesson to be learned from this experience is that given the interwoven nature of the global economy and consumed goods, the path of interest rates can struggle to sustainably decline if global inflation misbehaves,” said Petousis.

“A more imperative takeaway from the Ramaphoria period is that political goodwill alone cannot change the path of our country.”

For this time to be different, South Africa needs capable leaders to execute their mandates effectively after many years of decline in key government departments. 

Only the right mix of ingenuity and skill can improve South Africa’s growth prospects and ultimately reduce unemployment.

Some political parties have, for example, proposed ideas for revamping Home Affairs and resolving the ongoing tourist visa issues that frustrate sectors of the economy.

Strong leaders in the right roles in key departments could have a tangible impact, as we saw when Edward Kieswetter turned the SARS around after state capture had eroded its operational ability and institutional integrity. 

“Only time will tell if we can see a similar rebuild take place on a grander scale as the GNU and newly minted ministers find their feet.”