The Key to South Africa’s Vote Is the Margin of Victory

(Bloomberg) -- With the winner of South Africa’s May 8 elections hardly in doubt, it’s uncertainty around the margin of victory for the ruling African National Congress that has stock investors’ attention.

Money managers and analysts have said a strong showing for the ANC, potentially exceeding 60 percent of the vote, should boost stocks by strengthening President Cyril Ramaphosa’s ability to drive improvements in Africa’s most-industrialized economy. But opinion polls show differing pictures of ANC support, ranging from 51 percent to 61 percent.

The Key to South Africa’s Vote Is the Margin of Victory

A decisive victory would empower Ramaphosa’s pro-business agenda, including releasing spectrum to the telecommunications sector, said Warwick Bam, head of research at Avior Capital Markets in Cape Town. A less-restrictive visa policy for visitors would spur tourism earnings, while clearer policy on the thorny land expropriation question would improve investment in agricultural production.

“Food producers, food retailers, consumer staples, apparel retailers and hospitality will benefit the most from the increased consumer confidence,’’ Bam said, followed by banks and insurers. Industrial, construction and cement companies may see a delayed benefit as money flows into projects in the next one to two years, he said.

A resounding ANC victory would trigger a rally in South African assets, Colin Coleman, head of of Sub-Saharan Africa at Goldman Sachs Group Inc., said in a Bloomberg Television interview this week. Were the ANC to reach the 60 percent-mark, “then the market will be very bullish,” according to Coleman. Anything below that level would limit Ramaphosa’s ability to make the changes he wants, he said.

Investors are showing few signs of anxiety as next week’s poll approaches. South African stocks have made their best start to a year since 2007, advancing 11 percent as of the end of April, almost in line with the 12 percent gain by emerging-market peers. The benchmark index advanced 1 percent in Johannesburg Friday, the most in more than two weeks.

The Key to South Africa’s Vote Is the Margin of Victory

Investors have been frustrated that, despite Ramaphosa’s good intentions, the South African economy remains “trapped in stagnation,” with a lack of political will to make the changes needed to escape from this, said Sandy McGregor, who helps manage 566 billion rand ($39 billion) at Allan Gray in Cape Town.

The Key to South Africa’s Vote Is the Margin of Victory

The key post-election issue is whether Ramaphosa will be “more assertive in implementing changes which he knows are necessary if the economy is to start growing again,’’ said McGregor. “Perhaps the most liberating aspect of the election will be that it is behind him.’’

The Key to South Africa’s Vote Is the Margin of Victory

Investors should keep an eye on the contest for control in South Africa’s nine provinces, said McGregor. Voters may feel more free to express their discontent with the ANC’s poor record over the past decade in this part of the ballot. An adverse provincial outcome for the party will promote further policy debate, “which may have profound political and economic consequences.’’

A clear majority for the ANC in Gauteng, the richest province and economic hub that includes Johannesburg, would be a positive for equity investors by removing the need for a potentially unstable coalition government in the region, said Arthur Kamp, economist at Sanlam Investments, which oversees more than 400 billion rand.

Worst Case

A sell-off could ensue if the ANC fails to win decisively, or if Ramaphosa proves unable to consolidate power within the party, according to Avior’s Bam. In his “worst-case scenario,” the ANC’s majority falls below 55 percent and the far-left Economic Freedom Fighters party wins more than 12 percent of the vote. Such a result could also spur social unrest and hurt consumer and business confidence as South Africans would expect limited political reforms and a lack of accountability for corruption experienced in the past decade, he said.

Read more here on how investors see the election result affecting South African assets

The telecoms sector would be adversely affected by an election result that prolongs policy uncertainty, Citigroup Inc. said in an April report. South African energy and mining stocks could provide a hedge against a broader market sell-off, as these companies would benefit in the event of a slump in the rand because of their local-currency costs and sales of dollar-priced products, the bank said.

©2019 Bloomberg L.P.