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Thursday, 23 May 2024 16:17

South Africa's financial markets brimming with optimism ahead of elections.

By Khuleko Siwele and Colleen Goko, Bloomberg.

South Africa's financial markets are brimming with optimism as voters get ready to cast their ballots.

There's a widespread belief among investors that stocks, bonds, and the rand will keep soaring after the May 29 election, especially as record-hitting commodity prices boost the exports that South Africa’s economy relies on.

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, Africa’s two other powerhouses.

It’s another marker of just how dramatically investors have changed their minds about South Africa, which has suffered from years of power outages, poor economic growth and mismanagement.

Recent polls suggested the ruling African National Congress will lose its majority in Parliament, but win enough votes to avoid having to enlist less market-friendly rivals as coalition partners.

"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, chief executive 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 Holdings Ltd. and some real estate firms.

To be sure, investors were quick to point out that any rally will be short-lived unless the new government makes some dramatic reforms. In the survey, which took place between May 6 and 17, the majority of investors said curbing crime and corruption and easing the nation's debt burden are the most pressing challenges.

"The durability and extent of that rally will be determined by the ANC addressing long-standing challenges such as security, growth and fiscal issues," said Thys Louw, a portfolio manager at Ninety One UK Ltd.

"The challenges are immense, but going into the election, we've actually seen improvement in areas such as fiscal, which is encouraging.

Markets in Africa's most industrialized economy have been on a tear in recent weeks. The rand has touched a 15-month high against the dollar, yields on 10-year government bonds have dropped 60 basis points from their 2024 highs, and the benchmark stock index is near a record high.

There is room for further gains, according to Kamakshya Trivedi, head of global FX, rates and emerging-market strategy at Goldman Sachs Group Inc.

Goldman sees South African stocks outperforming emerging-market peers ex-China, and prefers domestic cyclicals and banks over export-oriented sectors.

"South African local assets – especially local bonds but also the rand and equities – are not expensive," Trivedi said. "If the election results allow more decisive action to address these fiscal or growth challenges, then there is room for the current rally to extend.

Sergei Strigo, a portfolio manager and co-head of emerging-market debt at Amundi, said he expects further economic reforms and improving implementation if the election produces a market-friendly result.

"This would make South Africa a structural play," he said.