It is important to emphasise that, in this note, only the impact of various ANC-win scenarios on SA is considered. The possible performance of any other political party has not been examined, due to the size of the ANC and its dominance of the SA political landscape over the last 25 years. The commentary below does not endorse the ANC or any political party but is purely a possible future-scenario exercise for investors.
The base case is for a relatively strong ANC election win in May and a mandate for President Cyril Ramaphosa to continue with his reform and anti-corruption drive. This will improve investor confidence and should see strong inflows into the South African equity market. Recent market performance has indicated support for this view. However, this is by no means a certainty and risks are elevated.
Investors should be ready to react as the political drama unfolds, with a close eye on the balance of power in the provinces. SA has serious structural issues and the advances made in solving these are equally important. It should also be borne in mind that many of the factors impacting equity markets are global in nature and the SA political outcome is just one of the contributors. However, various segments of the SA market could perform very differently in varying scenarios.
How did the economy fare under various ANC presidents?
During the Nelson Mandela (1994-1999) and Thabo Mbeki (1999-2008) presidencies, SA’s economy thrived as government adopted austere economic policies and the country moved from bankruptcy (under apartheid, pre-1994) to a budget surplus. However, Jacob Zuma’s disastrous tenure dragged SA back to pre-1994 levels. As Figure 1 below shows, under Mbeki, the local economy entered negative territory in only one quarter (Q4, 2008), which was likely due to the global financial crisis (GFC).
The average GDP growth rate was at 4.2% for Mbeki’s presidency, with the country recording 37 consecutive quarters of positive economic growth (Trevor Manuel was Mbeki’s finance minister). After Mbeki resigned (effectively recalled), and Kgalema Motlanthe was placed in the position of interim president, SA posted its first recession (Q1 and Q2 2009 saw negative growth) since the advent of democracy. During the Zuma years, average GDP growth slowed to around 1.8% for the period of his presidency, which ended in February 2018. While this was also due to some extraneous factors, policy uncertainty, corruption on an unprecedented scale (the Gupta family, Bosasa and so on), a revolving door of finance ministers, among others, kept investment, both foreign and domestic, away.
Figure 1: GDP (quarter-on-quarter annualised growth) under each of the democratic presidents
Looking at the rand/dollar exchange rate, when Zuma took office (May 9, 2009), it stood at around R8.27/$1. However, the average exchange rate for 2017 (the last year of Zuma rule) was at R13.31/$1 – depreciation of around 61% for the period he was president, versus a decline in the rand of around 30% during Mbeki’s presidency. When Mbeki took over from Mandela, the unemployment rate stood at around 22%. According to Stats SA’s latest Quarterly Labour Force Survey (Q4, 2018) it is currently at 27.1%.
Figure 2: Rand vs US dollar (Zuma years)
The fragility of the South African economy, with opposing forces in the ANC making the right economic outcome difficult to achieve, is underscored by the fact that Moody’s may downgrade SA’s sovereign credit rating to junk in November (or sooner), joining Fitch and S&P, which already have SA at sub-investment grade. Moody’s is the only major rating agency that has SA at ‘investment grade’ – one notch above junk (with a stable outlook). If Moody’s decides to downgrade the country, it will result in SA falling out of key gauges such as the Citigroup World Government Bond index, which may, in turn, prompt investors to dump as much as R100 billion of SA assets, increasing the cost of debt and putting more pressure on the rand.
Possible-outcome scenarios and your investment portfolio
Political analyst Stephen Grootes notes that this election sees the highest proportion of so-called floating voters ever – those that have, as yet, not made a final decision as to which party they should support, and these could go any way. While many voters would likely want to give Ramaphosa a chance to run the country with a resounding mandate, these same voters could also be reluctant to give the ANC another five years at the helm.
Below, we look at Anchor Capital’s four possible election outcome scenarios for the ANC and the best investment portfolio for each.
Scenario 1 – The ANC gets 58%-plus of the vote (55% probability)
If this happens, the current ‘repair’ scenario maintains momentum, with Ramaphosa emboldened and seen as having received the required mandate from the voters to solidify his position and steer ahead with his anti-corruption and growth agenda unfettered. Ramaphosa assembles a new cabinet, with few Zuma cronies or compromised individuals. He makes headway in managing rifts within the ANC, gaining the support of the ANC caucus and its national executive committee (NEC) as he intensifies the fight against corruption and state capture. This, in turn, will be positive for the local economy and we are likely to see more inflows of foreign direct investment and local investment into SA as ANC policies are (hopefully) clarified, especially those related to land expropriation without compensation (EWC) and nationalisation of the South African Reserve Bank (Sarb). A more certain future overall, with Ramaphosa perhaps serving two terms, boosting the JSE (bar any external offshore factors) and the rand strengthening.
· Rand vs US dollar at year-end: R13.30/$1
· 2020 GDP growth rate: 2.5%
· JSE 12-month return: 15%-plus
· Equity positioning: High exposure to SA Inc shares, especially the quality counters where foreigners take their exposure: FirstRand, Standard Bank, The Foschini Group, Dis-Chem, Bidvest, RMI, AVI, Coronation, Shoprite and Clicks. Property shares are likely to do well. The more cyclical counters such as Motus, Imperial and Super Group could also rise materially as expectations of economic growth improve. Rand-hedge shares would likely underperform with a strengthening currency.
Scenario 2 – The ANC gets 50%-58% of the vote (30% probability)
If this happens, we expect pressure on Ramaphosa from his detractors within the governing party. There will likely also be a push for more radical ideas – aligned with some of the views of the Economic Freedom Fighters (EFF) – from within the ANC. In this scenario, Moody’s is likely to downgrade SA, certain Zuma-aligned individuals remain in cabinet and Ramaphosa does not have the entire ANC caucus behind him. Zuma-aligned individuals remain strong enough to veto any radical changes Ramaphosa plans to make in order to give the economy a kickstart.
· Rand vs US dollar at year-end: R14.50/$1
· 2020 GDP growth rate: 1.5%
· JSE 12-month return: 5-10%
· Equity positioning: A weaker currency would benefit many of the rand-hedge shares on the JSE, so ironically there could still be a reasonable performance from the JSE. We would limit SA exposure to high-quality shares that are less sensitive to economic growth, with their own individual growth stories, such as Dis-Chem, Bidvest, RMI and Discovery. This portfolio would be weighted to rand-hedge and offshore shares such as Sasol, Bidcorp, Reinet, Naspers, offshore property companies (Nepi Rockcastle, EPP and MAS) and resource counters.
Scenario 3 – The ANC gets less than 50% of the vote (10% probability)
This will be a shock result and, in this scenario, the EFF (Julius Malema) will likely emerge as Kingmaker. Moody’s downgrades SA’s sovereign credit rating to junk, Ramaphosa becomes a toothless, lame-duck president and his job of turning SA around will be arduous, if not impossible. The likelihood of attempts by the Zuma faction (which emerges stronger) to remove him at the 2020 ANC national general council rises. Our political landscape changes as coalitions become the order of the day, resulting in parties having to compromise on key issues.
In the event of this happening, property and banking counters will come under renewed pressure. The performance of the property sector has not been encouraging for quite some time now, with the head of the country’s biggest listed real estate company, Growthpoint, saying that potential tenants were unwilling to make long-term commitments, leading to landlords cutting prices. In the event of the ANC getting less than 50% of the vote, the EFF is expected to have more leverage when it comes to EWC.
· Rand vs US dollar at year-end: R16.00/$1
· 2020 GDP growth rate: 1%
· JSE 12-month return: 0-5%
Equity positioning: We would expect SA Inc shares to fare poorly and weigh heavily on the JSE. Offshore and rand-hedge shares would perform well as a result of the weaker currency.
Scenario 4 – The EFF wins over 25% (5% probability) and the ANC gets less than 50%
The Black Swan outcome. While 5% is probably too high a probability for this outcome, it has been included as there have been numerous shocks globally over the past few years as global populism prevails – Donald Trump and Brexit among the prime examples. A coalition government would become a reality and policy would become much less market-friendly. Investor confidence could be shaken and the rand would likely take a tumble, leading to higher inflation, a possible increase in interest rates and a sharp decline in SA Inc shares. This would potentially be very negative for economic growth and job creation.
· Rand vs US dollar at year-end: R18.00/$1
· 2020 GDP growth rate: 0%
· JSE 12-month return: -10%
· Equity positioning: While rand-hedge shares would benefit from a weaker currency, this would be offset by a sharp decline in shares that generate their profitability in SA. Our SA weighting would be very low and the portfolio would be weighted to rand-hedge and offshore shares such as Sasol, Bidcorp, Reinet, Naspers, offshore property companies (Nepi Rockcastle, EPP and MAS) and resource counters.
Investors in the South African market are going through emotional turmoil at present, with local news getting worse, although the global backdrop is proving supportive. Hence, sectoral exposure is increasingly critical, and these could be materially differentiated over the coming months. However, an emboldened Ramaphosa could lead to more certainty as well as more definitive policy moves that are likely to boost a flagging SA economy.
Peter Armitage is CEO of Anchor Capital.
This is a shortened version of a report that can be seen here.