A trio of election results this past week serves to highlight just how inaccurate markets can be in anticipating and pricing political risks, especially in emerging markets. Investors and analysts were caught somewhat off guard by unexpected outcomes from polls in India, Mexico, and South Africa.
In India, stocks and the rupee dropped sharply as it became clear that Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) would not win by the expected landslide. Under Modi’s watch, the Indian stock market has boomed in recent years, becoming one of the top performers among emerging markets.
With Modi needing to turn to BJP’s alliance partners to secure a majority, there is now more uncertainty about economic policy. Before the announcement of election results, Indian stocks had risen more than 30% over the past year, far outrunning the performance of Chinese equities. Yet, as the results unfolded on Tuesday, India’s stock market index fell by 5.9%, the biggest decline in more than four years, only to recover to an all-time high today.
In Mexico, meanwhile, stocks fell more than 6% on Monday and the peso closed at its weakest to the dollar since November after the country’s left-leaning ruling party looked set for a super-majority in Congress that some commentators fear might bring constitutional change and diminish checks and balances.
When it comes to South Africa, we have seen a fair amount of volatility in the days leading up to and after the declaration of election results. Against a backdrop of a weaker dollar, the rand strengthened to around R18.28 the day before the election, with markets pricing in sufficient polling by the African National Congress (ANC) to avoid having to co-opt more populist parties to form a coalition government.
As the actual results came out, showing a 17 percentage point decline in support for the ANC, the rand tumbled and the JSE dipped by 2.4%. On Monday, South Africa’s rand, stocks, and government bonds then briefly gained on speculation that the ANC would pursue a tie-up with the market-friendly Democratic Alliance (DA).
Markets have since struggled to digest how the possible permutations of government might affect stock markets and the economy—with these uncertainties having led to a weaker rand bias.
ANC President Cyril Ramaphosa’s announcement last night that his party would pursue a government of national unity (GNU) has not settled the local currency. With a week of tough negotiations ahead between parties with wildly divergent ideological outlooks, the uncertainty is set to continue.
Markets may fear that this arrangement – rather than a coalition or confidence and supply agreement between the ANC and an opposition party – will be unstable or lead to paralysis in the legislature.
With the ANC losing its majority for the first time in 30 years of democracy – and by a significant amount – South Africa is entering uncharted territory. Although many observers may find some clarity once the new government is announced which may not necessarily be by 16 June 2024, we believe that it will take at least several months until the rules of engagement are fleshed out between the different parties. With all these variables, it will be extremely difficult for the financial markets to accurately price in the political risks.
Although we will embrace any high-road election outcome, our default investment stance remains heavily biased towards offshore equities, while with local exposure, we have a preference to hold short-duration South African bonds versus longer-duration counterparts.
We believe that this is a defendable investment approach rather than trying to price in domestic political risks against a background of multi-party jockeying and policy uncertainties, a strategy adopted by many local and global investors that has been deeply flawed to date.
“If there is a coalition or minority government for which various preferences for spending have to be accommodated, that may result in further spending pressure. The governability of South Africa may become even more difficult compared to the single-party rule. And that may present risk for the sovereign credit rating.”
– Dennis Shen, Berlin-based senior director for sovereign and public sector at ratings agency Scope.
Global News
- Elections in India, Mexico, and South Africa, are shaking emerging markets, emphasising the impact of politics on economic stability.
- India’s prime minister, Narendra Modi, vowed to continue holding his position despite his party losing its majority in parliament. A coalition led by Modi’s Bharatiya Janata Party secured enough seats to form a government if it sticks together, although the party remained short of the 272-seat majority on its own.
- Claudia Sheinbaum won Mexico’s 2 June election, becoming the country’s first female president after a landslide victory. With 58% of the vote and the likelihood that her coalition will almost certainly obtain a supermajority in Congress, her ruling party will be able to shape Mexico, even by altering the constitution. The win is thanks in part to her party, Morena’s redistributive policies, a combination of cash transfers, and constant rises in the minimum wage.
- Wealthy people in the UK are rushing to protect their money after Prime Minister Rishi Sunak surprised the country by calling a summer election. Some are cashing in investments, paying off bills that may soon rise, or leaving the UK entirely, according to interviews with more than two dozen high-net-worth individuals, who asked not to be named, and wealth advisers.
- Since Brexit, British brands and retailers have seen sales to the European Union (EU) drop by £5.9 billion (~$7.54 billion), despite a flourishing European e-commerce market according to Tradebyte research conducted in partnership with Retail Economics. The UK non-food export environment, particularly in the clothing and footwear sector, has faced significant challenges after Brexit, with exports in this category falling from $9.46 billion in 2019 to $3.45 billion in 2023.
- S&P Global Ratings downgraded France, tarnishing President Emmanuel Macron’s record for debt management and plunging him deeper into political difficulties a week before that country’s elections. S&P highlighted the French government’s missed goals in plans to restrain the budget deficit after huge spending during the COVID-19 pandemic and energy crisis.
- According to the latest Bloomberg Markets Live Pulse survey, the Fed will face a significant risk of losing its independence to ramped-up political interference if Donald Trump is elected president again. 44% of respondents said they expect Trump to seek to politicise the central bank or limit its power if he returns to the White House. Overall, they put a probability of 40% on the Fed losing its autonomy under a second Trump administration.
- Global government bonds posted their longest rising streak since December, as the worldwide pendulum of market consensus swung once again toward more interest-rate cuts this year. A Bloomberg gauge of sovereign bond returns rose for a fifth straight session on Wednesday as investors ramped up monetary easing wagers from the US to Australia.
- The European Central Bank has lowered its interest rate by 0.25bps to 3.75%, as expected, moving away from a record high. Officials said the inflation outlook has improved “markedly,” though they’ll “keep policy rates sufficiently restrictive for as long as necessary” after also raising projections for prices.
- Nvidia became the first computer-chip company ever to hit $3 trillion in market capitalisation on Wednesday, overtaking Apple on the Nasdaq. It was already the world’s most valuable semiconductor firm. Shares in the company have rallied roughly 147% this year, adding about $1.8 trillion in market capitalisation as the insatiable demand for its chips used to power artificial intelligence tasks skyrockets. Nvidia and AMD are battling it out to take control of AI as both companies showcased new generations of the chips powering the global boom in AI development.
- Apple is expected to announce its first batch of generative AI tools for the iPhone and iPad next week, as part of a greater effort to breathe new life into its struggling product lines. Some experts believe that AI could soon find its way onto the Vision Pro mixed reality headset, which has only been on the market for a few months.
- Hewlett Packard Enterprise shares surged as much as 16% to trade at a record high on Tuesday after the company reported better-than-expected revenue fuelled by sales of servers built for AI work. Second-quarter revenue increased 3.3% to $7.2 billion. Wall Street projected a 2% decline year-over-year to $6.82 billion. Profit, excluding some items, was 42 cents per share in the period ended April 30. Analysts, on average, estimated 39 cents.
- Shein is set to file for an initial public offering in London, which could value the company at about £50 billion, according to a source. Shein’s offering could become one of the UK’s biggest-ever IPOs, clawing back a chunk of the market value London has lost from companies shifting their primary listings to New York. The London Stock Exchange also has largely missed out on this year’s revival of European IPOs.
- As at Thursday’s close the S&P 500 was up 1.43% for the week.
Local News
- President Cyril Ramaphosa and the ANC’s national executive committee (NEC) announced late on Thursday night that the party had decided to form a Government of National Unity after suffering its worst electoral defeat in May’s general election. The decision will now be taken to invite minority parties with which the ANC has already conducted exploratory talks ahead of the meeting. These include the DA, IFP, EFF, National Freedom Party and the Patriotic Alliance. However, it is uncertain whether these parties will buy into the ANC’s proposals, the details of which still need to be negotiated. DA officials have said that they await the EFF’s response to Ramaphosa’s proposals before formulating their own response!
- Political analyst Moeletsi Mbeki believes that regardless of which party the ANC forms an agreement with, the status quo is likely to remain if economic policy does not change. “I don’t see the main policy [changing] because all parties are beneficiaries of this hugely paid public sector and they want to retain it. The South African economy is going to continue stagnating with the present parties.” Mbeki reiterated his long-standing belief that South Africa should do away with B-BBEE, which he believes has been the main driver of corruption and inefficiency within the government.
- Roelf Meyer, who negotiated South Africa’s first transition from apartheid to democracy with President Cyril Ramaphosa, said every leader must take the responsibility to exercise maximum respect for voters over the next few days. “No one can cry victory… No party has more than 40%, so there is unhappiness with all the parties to some extent.” Read the full interview here.
- Because the ANC lost its majority, it has 71 fewer parliamentary seats, meaning some of President Cyril Ramaphosa’s first choices to be ministers in the cabinet are ineligible, and he can only pick two people from outside the pool of MPs. High–profile serving members of the Cabinet who will not make it back to the National Assembly include Police Minister Bheki Cele, Defence Minister Thandi Modise; International Relations Minister Naledi Pandor, Social Development Minister Lindiwe Zulu, Minister in the Presidency responsible for Women, Youth and Persons with Disabilities Nkosazana Dlamini-Zuma, Labour Minister Thulas Nxesi and Noxolo Kiviet, the Public Service and Administration Minister.
- Ramaphosa also lost a strong ally in Zizi Kodwa, who resigned as sports minister and had to step aside this week after being arrested and charged for corruption.
- The rand fell to close at R18.95/$ on Thursday, its weakest level since 25 April, while the yield on 10-year notes rose nine basis points to 12.21% and sovereign dollar bonds sold off as the ANC said it’s considering a government comprising several parties, rather than a tie-up with the business-friendly DA.
- GDP unexpectedly contracted 0.1% in the first quarter of the year compared with the previous three months. The economy is likely to remain stagnant for the rest of the year barring a boost from the global economy, according to economists. The January-to-March contraction follows a revised 0.3% expansion in the past three months of 2023. Yet, economists believe that lower levels of load-shedding will help the economy pick up pace later this year.
- The Absa Purchasing Managers’ Index, which measures confidence in the manufacturing sector, took a nosedive of over 10 points into negative territory in May. That suggests manufacturing output may have declined during the month amid concerns about election outcomes. The print raises the prospect that the economy is tipping into a recession.
- New vehicle sales in South Africa plunged by 14.2% year-on-year in May as consumers and businesses seek political stability. Figures released by the Automotive Business Council on Monday showed the May new vehicle market declined by 6,137 units, while export sales also recorded a substantial decrease of 5,712 units or 19.1%.
- The Revenue Laws Amendment Bill, which establishes what is known as the “two-pot” system, was signed into law over the weekend by President Cyril Ramaphosa. The law provides access to retirement savings without retirement fund members having to resign or cash out the entire pension funds.
- Ninety One’s assets under management passed the R3 trillion mark on Tuesday, cementing the company’s place as the country’s largest money manager. Ninety One’s assets under management could have been more if not for the more than £9 billion (R217.7 billion) in net outflows it reported in the period, largely from its offshore business.
- RCL Foods is set to list iconic South African chicken company, Rainbow Chickens, on 26 July as part of an unbundling to its shareholders, despite tough markets, both on the bourse and in the poultry industry. Shares in RCL Foods initially gained more than 11% after its shareholders approved the listing and unbundling before paring gains to close 5% higher. Remgro owns 80% of RCL.
- As at the time of writing the rand was 0.60% weaker and the ALSI was 0.56% up for the week.
Sources: IOL, CNN, Bloomberg, BizNews.com, The Guardian, Moneyweb, Daily Investor, CNN BusinessLIVE, Daily Maverick etc.