With the country on tenterhooks as it awaits Friday’s first sitting of parliament and the confirmed details of a Government of National Unity, Old Mutual Investment Group (OMIG) believes this is a positive moment for South African democracy, with change to the previous status quo being an increasingly possible catalyst to unlock value in local markets.
“Maintaining the status quo may have delivered familiarity for markets, but it certainly did not deliver growth,” said OMIG head of equities research Meryl Pick.
Speaking at a press briefing in Johannesburg on Wednesday, Pick pointed out that, while markets are currently experiencing pronounced uncertainty, South Africa is no stranger to volatility, being an emerging market where market conditions are often uncertain.
She adds that the local market's discounted trading levels present significant investment growth opportunities. “The South African market is currently as undervalued as it was during the global financial crisis, making such levels an attractive entry point with strong potential to recover sharply, should we see a more market-friendly centre-right leaning outcome that is largely being touted as the most likely outcome of the current coalition talks,” she explains.
Pointing to other emerging markets and their post-independence journey to democracy, she highlights how relatively young South Africa’s democracy is within this context. “Ultimately, SA’s democracy is maturing right on time in the grand scheme of things, and this offers prospects.”
Jason Swartz, Portfolio Manager at OMIG and a co-presenter at the event, added that they “always expected initial market shocks that come with an election cycle, which we observed when certain possible coalition groupings were being priced in domestic asset classes. However, as expected, the market normalised once the dust settled”.
Swartz also says that any extreme or sustained market movements would depend on critical policy implications of the government's formation on Friday, specifically around growth enhancing reforms, which would likely not be known any time soon.
When it comes to the market’s preference between a coalition government or a government of national unity, Pick explained that the market and the electorate share common goals. “Both want a government that delivers basic services, creates jobs, keeps the lights on, manages the ports well and ensures stable state-owned entities. Ultimately, what benefits the market also benefits the people, and vice versa. It therefore does matter not what the label of the new government is as long as it is structured to deliver on these requirements,” she said.
Despite the current market anxiety, Pick says OMIG will continue to stick to its positioning strategy, because "the only certainty is uncertainty", as she put it.
"We see no reason to change our positioning even ahead of Friday’s inaugural sitting of the new parliament. We are, however, hedging against tail risk events, and any potential significant currency movements using derivates,” he added.
OMIG has maintained an neutral position in South African equities and an underweight position in global equities. Swartz mentioned that the upcoming US elections later in the year also posed significant uncertainty for the local market via economic policies impacting global trade and inflation.
Pick also pointed out the globalised nature of the Johannesburg Stock Exchange (JSE), noting that approximately 75% of earnings come from international markets, while the remaining 25% comes from South Africa and the rest of Africa. "For example, as a commodity-based market, developments in China can have a substantially larger impact on our market than local events," she explained.
The upcoming parliamentary session on Friday is expected to clarify the leadership of the new government's structure. Prior to the ANC announcing that it would pursue a government of national unity, there had been significant opposition, particularly from unions, towards a potential ANC/DA coalition which seemed to be in the works at the time. Swartz said he was quite surprised by the hostile view of the unions towards this potential coalition.
Swartz explained: "This opposition was surprising given that such a coalition would likely pursue market-friendly policies would bring much-needed economic stability, leading to job creation, economic growth, and these would be benefits for union members, including the growth of their pension funds and an improved business environment”.
Swartz further warned that a left-leaning, state-centric approach with an expanded social state and prescription of retirement assets could pose challenges to economic and market growth, hindering job creation and adversely affecting union members.
Pick echoed this sentiment, adding that “while there is consensus on the need for job creation, the methods to achieve this differ. Some parties view state employment as the means to create jobs whereas others view private sector as the route. Both can work but expanding the state’s role funded by the current tax base is unsustainable, particularly with past evidence of irregular expenditure. Up to now the ANC government has carefully balanced social reform – social grants, affirmative action and black economic empowerment – with measures to correct our growth trajectory such as increased private sector involvement in state owned enterprises. ".
Pick concluded by emphasising the current period's potential. "Rather than viewing this as a risky time in the market, we see it as an opportunity for meaningful change. It’s a time to prioritise service delivery and unlock economic growth,” Pick said.
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