Instability will be our GNU reality
As the dust settles on South Africa’s national elections, we can all heave a sigh of relief. With the formation of a clunky Government of National Unity (GNU) that excludes the two most radical parties, South Africa has again walked back from the abyss. Markets nervously cheered the result. Portfolio manager NANCY HOSSACK discusses the election outcome and what South African investors might expect from the GNU government in the years ahead.
When Jacob Zuma infamously appointed ‘Weekend Special’ Des Van Rooyen as Finance Minister for a spectacular 48-hour term in 2015, a radio commentator — possibly Bobby Godsell — memorably noted that ‘South Africa has a history of repeatedly walking up to the precipice, peering over it, and then deciding “not today”’. This has been the reality under which South Africans have lived since the formation of the Union. Arguably, life was even more volatile before then.
This observation describes well the current state of the nation following South Africa’s 29 May 2024 national and provincial elections. In my opinion, the election result was not good news. Faced with ten years of declining living standards, voters abandoned the ANC in large numbers. A decade ago, the ANC received ten million votes. In this election, the party only managed to scrape together six million votes.
What the poll numbers don’t show is that the vast majority of South Africans chose not to vote. In a damning indictment of the democratic process, 60% of eligible voters did not vote. This cohort includes eligible voters who did not register and registered voters who did not vote. This highlights the distaste that has developed for politicians in general and a growing feeling of helplessness in the country.
Where voters did shift their votes, they shifted them to Jacob Zuma’s MK Party. The MK Party advocates a radical-left ideology that includes state ownership of all land and the dismantling of South Africa’s constitution. Its leadership is thoroughly associated with corruption. In the face of the hopelessness created by many of these individuals, South Africans are turning to more radical policies proposed by the same people.
This is not good news. A silver lining has been the formation of a GNU, comprising the ANC, DA, IFP and other smaller parties. Freed of its most radical elements, the ANC has chosen to turn back to the political centre — in essence, stepping back from the precipice.
While this is welcome relief, we also remain cautious. We have agonised over the different trajectories that this election could determine for the country. Knowing the possible set of coalition partners, we think there is a high probability that no coalition — in the GNU or at provincial and metro level — may last even five years. Instability will be our new reality.
The last few weeks provide ample examples. I would point to the last-minute negotiations between the ANC and the DA, which were incomplete even as the day dawned to elect the president. In fact, there was still ‘no deal’ as the Chief Justice was swearing in members of parliament. And then came the haggling over cabinet and provincial posts, which continues to threaten the stability of the GNU.
The trouble is that the ANC is a tricky coalition partner. While it is less divided than it was in 2018 when Ramaphosa was elected as party president, it is still highly factionalised, with many competing interests. These competing interests will now be fighting over diminishing spoils, which will increase internal pressure. Many party members are implicated in corruption and now risk prosecution if portfolios are handed over to other parties.
This is well illustrated in President Ramaphosa’s cabinet. It is obvious that despite the Statement of Intent signed between the DA and the ANC, he awarded a disproportionate number of ministries to his own party and other smaller parties, at the expense of the DA. It suggests that the ANC has not quite come to terms with the sharing of power.
Markets nervously cheered the results. While the rand, SA bonds and SA Inc. shares — notably financials — rallied, none of these assets are trading at optimistic levels relative to history: rather, the valuations suggest only relief that a very negative outcome has not come to pass. We saw a similar market event in 2018, after Ramaphosa’s earlier ANC elective conference win — by the thinnest of margins — which the market dubbed ‘Ramaphoria’. It did not last long.
The political — and therefore policy — uncertainty I have described produces what the investments industry calls ‘risk premia’. The risk premium (see ‘Did You Know?’) describes the extra return investors in SA assets require to compensate them for potential for negative outcomes. The adverse risk premium on SA assets is likely to remain a headwind unless the country achieves consistent economic growth. And everything will depend on growth, which has been elusive for the past decade.
The big question is whether this coalition can deliver the structural growth that South Africans — and investors in South African assets — need. We think that in the near term there should be improved growth from a very low base. We know that discretionary and fixed-asset spending has been extremely low leading up to the election. For example, the value of building plans passed (adjusted for inflation) has stagnated at 2004 levels. We should see some normality in these and other metrics, which will be positive.
However, longer term structural growth is going to be harder to achieve. It requires that we deal decisively with infrastructure failures and invest more money in fixed capital formation. To do so, we need competent ministers and directors general in portfolios like Public Works, Transport, Electricity, Trade and Industry, Water and Sanitation, and Finance. We also need increased competence from the Presidency to influence the renewal of state-owned enterprises. In this regard, Ramaphosa’s cabinet announcements were a mixed bag: competent appointments were made in the Electricity, Finance and Public Works portfolios, but appointments in the four other key portfolios were underwhelming.
If South Africa fails to achieve meaningful growth, it will suffer from an increasingly accelerating debt trap. With this risk growing, Foord has maintained a low weighting to South African nominal bonds in its South African multi-asset portfolios, which include the Foord Conservative, Balanced and Flexible Funds. However, we have been increasingly adding to our inflation-linked bond investments, which we think offer considerable value and capital protection.
Foord’s investment style is to err on the side of protecting investor capital instead of speculatively chasing rainbows. Accordingly, in the lead up to the election we were overweight offshore assets to protect investors from a very negative — and underappreciated — coalition outcome. However, as the ANC’s negotiations with the DA progressed positively, we increased our exposure to SA Inc. assets, including nominal bonds and bank shares. This was fortunate as these assets rallied when the GNU became likely. Nevertheless, our portfolio returns will lag those of more aggressively positioned peers.
We broadly segment SA equities into SA Inc. shares, resources and offshore companies. At the time of writing, SA Inc. investments have rallied 9%, while resources and offshore shares are down mid-single digits on rand strength. Any changes we now make to portfolios will be circumspect. We continue to think that there may be some legs to the relief rally, but longer term growth is not guaranteed. Fortunately, SA asset prices — despite the recent rally — remain inexpensive. We continue to favour investment opportunities where companies can grow earnings despite the macro environment, as well as those that have considerable upside optionality.