The outcome of South Africa’s elections on May 29 was, as we noted in our newsletter last week, an unexpected but most positive turn of events.
Although in the weeks ahead of the election, markets were not accounting for a worst-case scenario with a coalition between the ANC and populist parties, they were also not pricing in what many economists, business leaders, and fund managers regarded as the outlier best-case scenario—the formation of a centrist government of national unity (GNU) with the African National Congress (ANC) and Democratic Alliance (DA) as the largest partners.
It is in that context that we need to look at the performance of the rand and ‘South Africa Inc’. stocks this week. The unexpected result helped to fuel a level of optimism South African markets have not experienced since Ramaphoria in February 2018. JPMorgan, for example, this week upgraded South African assets to ‘overweight’.
On the currency front, the rand broke beneath R18/$ for the first time since July 2023 and was trading around R17.90/$ at the time of writing, this level being at a rare premium to the fair value as calculated by our currency model. Meanwhile, bonds strengthened, and ‘South Africa Inc.’ stocks rallied strongly across the board as sentiment towards South Africa turned rampantly bullish. The FTSE/JSE ALSI on Wednesday was at an all-time high.
We see some parallels with the positivity that Cyril Ramaphosa’s decisive victory at the ANC electoral conference in December 2017 had on the markets. The rand strengthened by 20% from the month before Ramaphosa was elected as the president of the ANC to the point when Jacob Zuma was ousted and replaced by him (Ramaphosa) as president of the country. The currency’s strength was on the back of the reforms Ramaphosa was expected to introduce.
Yet Ramaphoria rapidly turned into disillusionment. The challenges that the President faced in improving service delivery, rooting out corruption, and implementing economic reforms overwhelmed him and the centrist factions within the ANC and as a result, the performance from South African assets has been tepid, at best when measured in dollar terms, during his first term as president.
As such, we are adopting a cautious perspective on the surge of South African asset prices and consider the GNU agreement to be just the beginning of what will hopefully mark a dramatic turnaround in the country’s trajectory.
There is much to celebrate in President Ramaphosa’s invitation to all political parties to form the GNU. This bold, strategic move was conditional on all parties committing to the constitution and setting aside political differences. These conditions effectively excluded left-leaning Economic Freedom Fighters (EFF) or uMkhonto we Sizwe (MK) from joining.
Yet the GNU is nonetheless a complex beast made up of parties with around two-thirds of the seats in parliament and diverse ideologies and working styles. Questions abound about the rules of engagement. Key concerns include whether crucial ministries will remain under ANC control and if ideological differences could threaten the GNU’s stability.
The gulf between the DA and ANC positions on issues such as foreign policy (particularly Palestine, Ukraine, and BRICS), National Health Insurance, and black economic empowerment remains as wide as ever. Furthermore, the ANC’s NEC and MPs include many that were named in the Zondo report or that face other charges of corruption.
How the DA, ANC and other parties in the GNU will iron out disagreements on these fundamental issues remains to be seen. One of the first major tests will be the announcement of the Cabinet—which remains the President’s prerogative. We will be watching with great interest to see how ministerial posts are divided up between parties.
A strong cabinet that sidelines the non-performers of the last administration would be a welcome start. But even in this case, the GNU will face a daunting task in addressing the structural weaknesses that constrain economic growth. We would want to see fast and decisive steps towards the sort of economic reforms Ramaphosa has long promised.
With that in mind, we question whether the broad JSE rally—encompassing even mining and property stocks—is sustainable. We believe South Africa’s financial markets have been sentiment-driven since the elections, with value investors climbing into local assets purely on the expectation that enduring changes to the country’s fundamentals will materialise.
Taking all factors into consideration, we are more inclined to externalise funds at these levels for our clients, rather than repatriating funds to South Africa. Indeed, our objective for our high net-worth clients remains to measure their wealth in dollars, thereby placing them in a position to be global citizens.
“The recent market optimism, it’s really good news. But you have to remember that the financial markets are not going to spill over that much into the real economy.”
– Dawie Roodt, Chief Economist
Global News
- The dollar has been flirting with a new 2024 high, supported by investors seeking shelter from political uncertainty in Europe even amid evidence of a slowing economy in the US. The Bloomberg Dollar Spot Index hovered around a mark just shy of levels seen last November as technical indicators reveal the greenback’s strength has room to run.
- The nonpartisan Congressional Budget Office increased the estimate for this year’s US budget deficit by 27% to $1.92 trillion in 2024, up from $1.69 trillion in 2023, according to updated projections released in Washington on Tuesday. The new estimate is more than $400 billion larger than what the office anticipated in February. This sounds a fresh alarm about an unprecedented trajectory for federal borrowing.
- The Fed’s latest economic projections indicate there may be just one rate cut this year. Some Fed Reserve officials emphasised the need for more evidence of cooling inflation before lowering interest rates on Tuesday. Member of the Fed governor’s board, Adriana Kugler, said it will likely be appropriate for the central bank to cut rates “sometime later this year,” while St. Louis Fed President Alberto Musalem said it could take “quarters” for the data to support a cut.
- Global investors are likely to keep pumping money into record-hitting stock markets, according to a survey by Bank of America. In response to a survey, conducted from 7 to 13 June, 32% of respondents opted for US stocks when asked about the asset class that would benefit most from a reallocation of money-market funds. Another 19% said the cash would go into global equities, while a quarter of the respondents indicated they would buy government bonds.
- A rally in chipmakers drove stocks to another record on Tuesday, with traders betting the potential for Fed rate cuts will keep fuelling the industry that has powered the equity market this year. The S&P 500 came closer to the historic 5,500 mark, hitting its 30th record this year, as Nvidia briefly became the world’s most valuable company and bonds climbed as traders piled into a $13 billion sale of 20-year Treasuries. See below for more on Nvidia.
- UK inflation slowed to 2% in May, falling to the Bank of England’s target for the first time in nearly three years as food price rises eased sharply. This means the UK is now ahead of most other G7 economies in bringing inflation back to the level central bankers try to maintain to help households and businesses. The Bank of England left the key rate on hold at 5.25% yesterday but said the decision not to ease was “finely balanced” for some of the nine members of the Monetary Policy Committee.
- As many as 9,500 people with at least $1 million in liquid, investable assets, will leave the UK, more than double the number that left in 2023 and a record number, according to provisional estimates contained in a report released on Tuesday by migration advisers Henley & Partners. The same report indicates that the UK’s exodus lags only China, which is expected to lose 15,200 millionaires this year.
- Computer chip company Nvidia was briefly the most valuable company in the world, taking over from Microsoft. Nvidia’s market capitalisation closed at roughly $3.34 trillion on Tuesday, edging past Microsoft’s $3.32 trillion value before slipping back 3.5% yesterday to $3.22 trillion, with Microsoft reclaiming the title as it held steady at more than $3.3 trillion. Apple is the third most valuable company in the US with a $3.27 trillion market cap. Shares of Nvidia have surged more than 200% over the past year and Rosenblatt Securities, one of its most bullish analysts, is projecting that the semiconductor giant will extend its rally, pushing its market value to nearly $5 trillion in the coming year.
- As at Thursday’s close the S&P 500 was 0.8% up for the week.
Local News
- President Cyril Ramaphosa took his second oath of office on Wednesday and promised to serve and protect the Constitution, despite the Phala Phala farm scandal cloud over his head. Ramaphosa has affirmed his commitment to working with all political parties in the new government, saying no party can go it alone.
- Yesterday, Ramaphosa began talks with ANC leaders and alliance partners, the Congress of South African Trade Unions, and the South African Communist Party on his new Cabinet. Discussions with the DA are likely to happen today. Enoch Godongwana is likely to be retained as finance minister, while ANC insiders indicate that former Joburg Mayor Parks Tau and former ambassador to the US Ebrahim Rasool are among those who are tipped to make it into Cabinet. A Cabinet announcement is expected on Sunday or early next week.
- ANC secretary-general Fikile Mbalula and DA federal council chair Helen Zille seem to be at odds about the conditions of Government of National Unity agreements. Mbalula signalled that he was confident the ANC would be able to make certain decisions without the DA’s buy-in, while Zille disagreed with Mbalula, saying there would be a need for consensus among the parties about Cabinet decisions and adding new partners to the unity government.
- Political commentator Justice Malala says keeping the new government intact may be far harder than it was 30 years ago. Noting that the deal has numerous critics, he says the DA and ANC have destroyed coalition partners in the past. Many within and outside the ANC and the DA want it to fail. Leaders must make it work and awaken the moribund economy.
- A BusinessLIVE editorial states that the new government isn’t merely a coalition; it’s a symbol of hope, a promise of change, and the potential blueprint for governance that transcends traditional party lines. Yet, it must act to resolve issues. Peter Bruce, Arena editor-in-chief, writes that the DA, which doesn’t have an economic policy, will have its work cut out for it to find common ground with unions.
- The market has reacted positively to the Government of National Unity, with banks helping the All Share Index to its biggest one-day gain as it climbed 3.5%, above 81,000 on Wednesday. The rand dipped below the R18 mark to the dollar, hitting R17.87 for the first time in more than 10 months. Economists are hopeful that the Government of National Unity will ease the South African Reserve Bank’s worries over delivering the first interest rate cut in three years before the end of the year, yet most economists are reluctant to revise their growth forecasts upwards until further details of the governmental arrangement emerge.
- Investec notes that it’s likely that there will be $2 billion to $3 billion in bond outflows from South Africa over the next 10 months, as Indian government bonds will be added to JP Morgan’s EM indices from the of end June with a weight of 1%. This would increase by 1 percentage point each month until a 10% weight in April 2025 and will be at the expense of other EM countries’ bond weightings in the index.
- Environmental Affairs Minister Barbara Creecy granted Eskom’s request for suspension of minimum emissions standards (MES) limits at some of its older power stations after lengthy appeals and consultations. “This allows these stations (Hendrina, Grootvlei, Arnot, Camden and Kriel) to continue to operate at existing MES plant limits until March 31 2030,” said Eskom. National Environmental Management Act air quality regulations specify that coal power plants must meet the limits by a certain time or they would be noncompliant and unable to operate legally.
- Meanwhile, Eskom will ask the National Energy Regulator of South Africa for an electricity tariff increase of 36.15% in 2025 for customers it directly charges and supplies. Customers relying on electricity supply from local authorities (municipalities) could also be slapped with an increase of 43.55%, according to a confidential document seen by Daily Maverick.
- Eskom’s financial problems are partly caused by the non-payment of municipal accounts. This week the High Court in Johannesburg ordered the City of Johannesburg and City Power to pay their outstanding debt to Eskom, which has grown to R3.4 billion. Eskom said the city has been defaulting on its electricity account since October 2023. The amount had ballooned since the end of March when it was R1 billion.
- The High Court has ordered Transnet to pay R8.5 billion to energy majors Sasol and TotalEnergies in a long-running dispute about pipeline tariffs. The issue stemmed from Transnet’s breach of its obligation to set pipeline tariffs for the conveyance of crude oil, as outlined in a 1991 agreement. Transnet had been overcharging Sasol’s oil division for years. Transnet says it will appeal the judgment.
- Illegal cigarettes have cost the South African Revenue Service billions of rand in revenue, money that could have been spent on education, the healthcare system, or the development of infrastructure. Financial Mail research shows that, in 2022, alone the tax man missed out on R14.5 billion in excise tax revenue and R3.3 billion in VAT revenue because of illegal cigarettes. This translates to an additional 1% of total revenue had it been collected.
- The South African Revenue Service will now enforce a 45% import duty and VAT on all low-value clothing imports, eliminating the previous flat-rate concession. This will affect the pricing model for direct from China e-commerce goods, such as Temu and Shein, making their products more expensive. Under the current system, parcels from companies such as Shein and Temu, valued under R500, benefit from a 20% flat rate import duty with no additional VAT.
- Standard Bank Group has become the latest South African company whose profits are being depleted by other devaluing African currencies. The biggest lender in Africa by assets said on Wednesday that its headline earnings grew by only low-to-mid single digits in the five months to the end of May after being negatively impacted by currency movements, mostly in Angola, Malawi, Nigeria, and Zambia.
- Less than a week after rumours began circulating about the potential closure of four print publications at Media24, the company has confirmed that about 800 jobs will be directly affected. Combined losses are projected to mount to R200 million over the next three years. After years of cutbacks, it had reached the end of cost reductions to try to save these print operations.
- As at the time of writing the rand was 2.2% stronger and the ALSI was 3.6% up for the week.
Sources: Dynasty, Business Report, AFP, Reuters, BusinessLIVE, Bloomberg, CNN, New York Times, News24, Moneyweb, TechCentral, energize, Daily Maverick, BBC, etc.
