ANC-EFF coalition could crush South Africa 

An ANC-EFF coalition could have disastrous effects on South Africa’s financial markets, with money flooding out of the country and the value of the rand collapsing. 

This is feedback from Jason Swartz, portfolio manager at Old Mutual Investment Group (OMIG), who said that investors are generally adopting a wait-and-see approach regarding the country’s elections at the end of the month. 

Swartz said that uncertainty surrounding South Africa’s elections has become a dominant force influencing local investment decision-making. 

This broadly mimics the effect of election uncertainty abroad as the United States and many other countries prepare to elect new leaders in 2024.

“Investors are sitting on the sidelines and seem content to wait for the election outcome before committing capital to invest in the local financial markets,” Swartz said. 

He explained that the result would shed light on post-election coalitions and their potential long-term policy implications.

While it is largely expected that the ANC will lose its majority following the election next month, it is unknown how far support for the ruling party will fall below the critical 50% level and what the post-election coalition will be.

Asset managers and investors are keen to know what policy shifts the local election could usher in, as this will give some indication of the likely impact on the risk and return dynamics for the market. 

Economists and market analysts hope that the South African government’s economic cluster will emerge with minimum disruption after the elections.

“We would like to see institutions like the central bank, National Treasury, and SARS retain their independence following the elections and that the country’s fiscal and monetary policy position remains orthodox,” Swartz said.

International investors, however, also remain concerned about certain election outcomes, particularly an ANC-EFF tie-up due to the latter’s radical approach to economic policy and nationalisation of key industries.

“The market reaction to an EFF coalition with the ANC could be disastrous from a risk premium perspective, and we would see that reflected in the rand and in capital outflows.” 

“Therefore, this is something that asset managers are actively hedging against,” Swartz said.

OMIG said it has undertaken quantitative analysis to understand the complexity and dynamics of how parties might perform in the election and what post-election political partnerships might look like.

Most asset managers are thinking about their positioning in domestic equities and whether to remain overweight equities or local government bonds.

The asset manager prefers bonds currently, though it admits to trimming some of its exposure in that asset class ahead of the local election “to reflect some cautiousness around what the post-election policy implications could be”.

As for the domestic market equities, Swartz said a lot depends on whether one embraces the risk premium on offer and to what extent one decides to hedge one’s positions.

“Investors that are not prepared to embrace or accept the risk premium in South African equities could consider adding exposure to global industrials or global defensives,” Swartz said.