SA markets soar ahead of uncertain May 29 election

As South Africa’s election looms, investors eagerly anticipate a market-friendly outcome, igniting a surge in the rand and stocks. Amid fears of a potential coalition government, recent polls offer hope for continuity, easing concerns over leftist policy shifts. With the ANC’s grip on power at risk, the stakes are high for global investors. While optimism prevails, the aftermath could see assets soar or plummet, shaping the nation’s economic trajectory for years to come.

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By Colleen Goko, Mpho Hlakudi and Adelaide Changole

The rand erased the year’s losses and South Africa’s benchmark stock index closed at the highest level in more than nine months as investors positioned for a market-friendly outcome in the May 29 election.

The currency is one of only three among 23 emerging markets monitored by Bloomberg that haven’t weakened versus the US dollar this year. An April 26 Ipsos poll marked a turning point for investors fretting over the risk that a poor showing by the ruling African National Congress could lead to an unpredictable coalition government.

“The recently released Ipsos poll revealed that while the ANC will likely lose its majority, a coalition with a less market friendly political party may be avoided,” said Brendan McKenna, emerging-markets FX strategist at Wells Fargo & Co. “Optimism for a degree of policy continuity post-election is pushing USDZAR lower over the last few weeks.”

The rand gained 0.4% to 18.3699 per dollar on Monday, the strongest closing level since since Dec. 29.

Cyril Ramaphosa, president of the African National Congress (ANC), poses for a photo with supporters during an election campaign event at Hammersdale Junction mall in KwaZulu Natal province, South Africa, on Sunday, April 21, 2024.

For the first time since White-minority rule ended three decades ago, South Africa is heading into national elections in which an outright winner isn’t apparent. A series of opinion polls show the ANC risks losing its majority in the May 29 vote and may have to enlist the support of one or more rivals to continue governing Africa’s most industrialized economy.

At the heart of investors’ concerns has been the prospect of a shift to the left in government policy. There has been speculation that the ANC could form an alliance with the more radical Economic Freedom Fighters or newly established Umkhonto WeSizwe party.

“From an investor perspective the election is binary; either assets will rally post the outcome or they will weaken substantially,” said Kim Silberman, macro strategist at Matrix Fund Managers. 

Silberman said offshore investors were likely to be underweight South African assets and a market-friendly outcome could see the currency rally toward 18.00 or below, “before settling at around 18.50 after the initial relief,” she said. 

In the event of an extremely market-unfriendly outcome, the rand could weaken toward 21.00 to the US dollar and bond yields could rise by as much as 150 basis points, Silberman said. That would take the generic 10-year yield to about 13.5%.

Cyril Ramaphosa, president of the African National Congress (ANC), poses for a photo with supporters during an election campaign event at Hammersdale Junction mall in KwaZulu Natal province, South Africa, on Sunday, April 21, 2024.

South Africa’s benchmark stock index climbed a seventh day Monday, its longest winning streak since June 2021. That’s taken the 14-day Relative Strength Index to 76.30, the highest level since November 2021. A level above 70 is seen by some technical traders as an indication that the market has risen too far and too fast.

Still, some strategists expect more gains based on past election outcomes. 

“South African equities have historically traded well in the three months leading up to the elections,” said Goldman Sachs Group Inc. strategists including Sunil Koul in a note to clients. “On a median basis, returns have been modestly positive in one and three months after the elections, although with wider variance within individual elections.”

Meanwhile, investors have been piling into South African local-currency bonds, with inflows reaching a net 13.3 billion rand ($724 million) on Friday, the second-biggest daily inflow since records began in 2019.

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