With less than two weeks to go before South Africa goes to the polls, the African National Congress (ANC) is pulling out all the stops to secure an outright majority in Parliament. The ruling party has somehow managed to dispel some of the negativity about corruption, unemployment, slow growth, and load shedding ahead of the crucial election.
ANC veterans like Tokyo Sexwale, Kgalema Motlanthe, and Thabo Mbeki have been roped into its powerful campaigning machinery—though Mbeki has reportedly suspended campaigning due to his concerns about corruption. What’s more, the ANC has made some bold promises about healthcare and load shedding to sweeten its offer to the electorate.
On Wednesday, the South African president signed the contentious National Health Insurance (NHI)bill into law. The timing of the signing of the NHI Act, in a ceremony at the Union Buildings with its promise of free healthcare for all at the point of service, was more about improving the ANC’s electoral prospects rather than government business.
Most commentators agree that it will take decades to fully implement the NHI and restructure South Africa’s healthcare system – if it’s even possible. Yet the ceremony was positioned as a major victory for the poor in the face of resistance from an uncaring elite and business sector.
Although announced in February 2021, this week also witnessed the passing of the Pension Fund Amendment Bill in the National Assembly. The new structure known as the “two pot retirement system,” provides for increased (but limited) access for retirement fund members to their pre-retirement savings.
In the Budget Speech in February, the ANC government announced a decision to tap into the Gold and Foreign Exchange Contingency Reserve Account. At the time, we noted that this move enables the government to kick the can down the road in terms of making hard policy decisions to address the country’s burgeoning debt-to-GDP.
The country is also enjoying its longest run without load shedding in three years. Eskom and the electricity minister say it’s because of energy market reforms and improved power station maintenance. Other observers suspect that load shedding is suspended because Eskom is burning huge amounts of diesel, has cut back on planned maintenance, and is circumventing environment emission controls at certain coal-fired generation plants.
This falls in line with something we’ve written about in previous editions of our newsletter – the ANC’s growing willingness to implement populist measures to win over the electorate. We remain sceptical about the fruit these measures will bear for the country, but the ANC will measure its success in terms of electoral support.
In that regard, many observers say that the ANC’s strategy seems to be yielding results. Pollsters such as the Social Research Foundation suggest the ANC’s share of the vote is now 45% – a major improvement from the 40% some polls were picking up just a few weeks ago.
Indeed, it now seems increasingly likely that the ANC will be able to secure between 46% and 51% of the vote in the upcoming election, depending on voter turnout in its rural strongholds. This will enable it to form a government on its own or with the support of smaller, more malleable parties such as the IFP – and thus continue business as usual.
As we noted in an earlier newsletter, other scenarios where the party’s support dips below 43% or 44% could see the ANC working with the Economic Freedom Fighters (EFF), Jacob Zuma’s uMkhonto weSizwe (MK) Party or the Democratic Alliance (DA), to form a government.
In our view, the rand, local equities, and local bonds are pricing in a “moderate” election outcome where the ANC garners in excess of 45% of the votes. At this morning’s exchange rate of R18.27/$, the rand is currently trading almost in line with our fair value model of R18.19. This narrow discount to fair value has traditionally proven to be an opportune time to externalise funds, as the discount has been as wide as 35% on past occasions, and the currency tends to spend most of the time at a discount to fair value, with limited periods when it trades at a premium.
Given our base case that the ANC will retain power without needing a large coalition partner, we expect the trends we have seen in recent years to prevail. We would not expect to see dramatic economic reforms of the sort needed to get growth going again; neither would we anticipate sudden populist shifts that will send markets plummeting.
The shock of our less likely scenarios notwithstanding, we expect the rand and the JSE to take direction from global developments – including the Fed’s moves on interest rates and the resulting impact on appetite for riskier growth assets, such as emerging market bonds and equities.
“The only people truly bound by campaign promises are the voters who believe them.”
– Christopher Hitchens, Author
Global News
- On Thursday, the Dow Jones Industrial Average touched the historic 40,000 mark on bets that rate cuts will keep powering Corporate America. Treasury 10-year yields rose four basis points to 4.38%. Stocks in Asia and parts of Europe rose on Thursday, also on bets that rates will be cut. The rally has pushed stock indexes on both sides of the Atlantic back into record territory.
- Inflation in the US cooled as the print was only up 3.4% for the 12 months ended in April, easing from 3.5% the month before, figures released Wednesday showed. This provides a bit of hope for Americans worn down by elevated prices. On a monthly basis, prices rose 0.3%, a slower pace of growth than the 0.4% seen in the two months prior. Economists were expecting a 0.4% monthly increase and an annual gain of 3.4%.
- In the more than two years since Russia invaded Ukraine, sending energy prices soaring, Norwegian oil and gas giant, Equinor, has taken over from Russia’s Gazprom. Norway now supplies 30% of the EU’s gas, although Equinor being the major player is problematic as supply issues will send gas prices higher.
- Singapore has a new leader in the form of Lawrence Wong, who took over from Lee Hsien Loong as the city-state’s fourth leader on Wednesday. The island has previously had just three prime ministers since its independence in 1965. The first was Lee Kuan Yew, the country’s founding father, who held office for over three decades, the second was Goh Chok Tong. The third was his son, Lee Hsien Loong. Singapore has few natural resources but has become one of the world’s richest nations when measured on a per capita basis.
- According to Bloomberg, China sold a record amount of Treasury and US agency bonds in the first quarter of this year, highlighting the desire to diversify away from American assets.
- US President Joe Biden has quadrupled tariffs on electric vehicles from China to 100%, effectively sealing off one of the world’s biggest passenger car markets to the largest global producer of EVs. He has determined that the future of EVs will be made in America by union workers. Economists expect that the newly announced $18 billion in tariffs will have a minimal near-term impact on GDP, inflation, and monetary policy. Washington’s drastic measure piles pressure on the European Union to defend its automakers, while China has blasted the move.
- The global chip battle is intensifying as the US and European Union have funneled nearly $81 billion toward developing the next generation of semiconductors, escalating a global showdown with China for chip supremacy. This is the first wave of close to $380 billion earmarked by governments worldwide for companies like Intel and Taiwan Semiconductor Manufacturing to boost the production of more powerful microprocessors.
- Microsoft has reportedly asked China-based employees to relocate, most of whom are Chinese nationals. The staff work on cloud computing and artificial intelligence and should consider transferring out of the country amid tensions between Washington and Beijing, according to The Wall Street Journal.
- Investments into the biggest US tech stocks show that investors are not only betting on innovation such as AI, but also hedging against inflation, according to some respondents in the latest Bloomberg Markets Live Pulse survey. 46% of survey participants see gold remaining the safe haven, while almost a third said tech giants are their first pick for being a haven.
- Google has announced that it will embed its search engine with its powerful AI model, Gemini. This draws on the rapidly advancing technology to directly answer user queries at the top of results pages, with the search giant saying, “Google will do the Googling for you”. News houses have warned about catastrophic consequences, such as a decline in audience.
- Tencent Holdings’ revenue and earnings beat estimates thanks to its TikTok-style video platform that gained traction against TikTok owner, ByteDance. This is despite a faltering Chinese economic recovery. Revenue for the three months ended March rose 6% to $22 billion. Stock in major shareholder Prosus – a proxy for Tencent’s stock– rose 5.2% in dollar terms this week.
- China’s Alibaba Group reported an 86% slump in fourth-quarter profit on Tuesday, mostly due to valuation changes from equity investments. This pushed its US-listed shares down almost 6% in early trading even though revenue beat forecasts. It also announced it would revive a plan first suggested in 2022 to upgrade its secondary listing in Hong Kong to a primary listing, while retaining its primary listing in New York. It aims to complete this dual-primary listing by August.
- As at Thursday’s close the S&P 500 was 1.4% up for the week.
Local News
- An ANC/DA coalition is the third and “best case” of the four scenarios modelled by Oxford Economics Africa. The DA may partner with the ANC if it is assured that there will be economic liberalisation, prudent public spending, and the promise of major cabinet appointments. However, the DA’s failure to see past race issues will be the ANC’s saving grace, Build One South Africa leader Mmusi Maimane said. Investors see an ANC and EFF coalition as a risk to inflation targeting, undermining the Reserve Bank, and potentially leading to a closer alliance with China.
- On Thursday, Parliament gave President Cyril Ramaphosa free rein to determine the amount political parties and independent candidates must declare, and how much money they can receive from one donor per annum. The limit that parties may only receive R15 million from one donor per year was scrapped after the Electoral Matters Amendment Act came into effect last Wednesday.
- The rand is finding some stability around stronger levels as the political risk of an ANC/EFF coalition nationally is seen to have faded, said Investec’s chief economist Annabel Bishop. Recent opinion polls have allayed concerns over such a coalition, and since late April, non-residents have been net buyers of domestic bonds to the tune of R3 billion after being net sellers in February and March.
- Retail trade sales in March beat economists’ expectations by increasing 2.3% year-on-year after declining 0.7% in February and 2% in January. This implies a negative contribution from the sector to total GDP at the start of 2024 and raises the risk of GDP contracting for the first quarter.
- Business Unity South Africa says litigation is possible over the National Health Insurance (NHI) Act. Trade union Solidarity and AfriForum have already said they will challenge the legislation. Underinvestment, corruption, and neglect by the state of public health facilities have meant that many government hospitals and clinics don’t meet the required service delivery standards, according to a report by the Office of Health Standards Compliance. Opposition parties have slammed the law as an election gimmick, while Insight Actuaries & Consultants joint CEO Barry Childs has warned that it “will be a systemic shock to the medical system” should it become a reality.
- Shares in Discovery and other South African medical insurers slumped after the announcement that the NHI Bill would be signed into law. Discovery dropped as much as 8%, the most since March, but has since recovered by 7.28%, while peers including Momentum Metropolitan Holdings, Sanlam, and Old Mutual also traded lower. Discovery has said the law is constitutionally flawed, but there will be no impact on medical schemes for the foreseeable future.
- Following Anglo American rejecting another bid from BHP Billiton, which was 15% higher at $43 billion, Anglo said it would exit diamond, platinum, and coal mining in a massive restructuring that has seemingly been brought forward after the initial February announcement that it would reorganise the businesses. The divestment will leave a much simpler company focused on iron ore and copper, a key metal for the energy transition. Anglo’s Duncan Wanblad says management can deliver radical change, showing that the company doesn’t need BHP Billiton to unlock value, while BHP’s Mike Henry says investors must judge his execution track record.
- Telecom operators were all in the red on the JSE on Tuesday, with MTN leading the losses, dropping R14.85 billion of its market value after it reported a fall in first-quarter revenue of almost a fifth. MTN’s service revenue fell 18.8% in the first quarter as the macro environment remained challenging amid local currency devaluations in some of its key markets.
- Entrepreneur Fabricio Bloisi has been appointed CEO of the JSE’s largest group, Naspers and Prosus, with effect from 1 July. Bloisi was previously the CEO of Prosus’ Latin American food delivery business, iFood. Prosus took full control of iFood for €1.5 billion (about R27.4 billion at the time) in 2022 after Bloisi grew it to become Brazil’s leading food delivery company.
- As at the time of writing the rand was 0.9% stronger and the ALSI was 1% up for the week.
Sources: Dynasty, Moneyweb, Bloomberg, Reuters, CNN, BBC, BusinessLIVE, News24, etc.