Companies with earnings linked predominantly to economic conditions — such as banks, insurers and retailers — lost billions of rand in value on Thursday as the first batch of election results pointed to the possibility of the ANC losing its outright majority by a bigger margin than initially expected.
As a result, the market became apprehensive about the possibility of the “worst-case scenario” that it has been fearing.
The country’s largest lenders — FirstRand, Standard Bank, Absa, Nedbank, Investec, and Capitec — lost altogether R52bn, causing the banking index on the JSE to drop 4%.
The country’s most valuable banking group, FirstRand, was down 5.04%, while Africa’s largest bank by assets, Standard Bank, lost 5.07% of its value. Nedbank was down 2.68%, Absa 3.51%, Capitec 3.54% and Investec 2.66%.
Worst case
The consensus in the sector — which has more than R11-trillion in assets — has been that the governing ANC would lose its outright majority control but nevertheless still garner enough support to form a coalition with a smaller party.
The country’s largest asset manager, Ninety One, and its peers also closed the day in the red.
The worst-case scenario for the financial services sector has been that of the ANC’s support plunging to the low 40s, leaving it dependent on parties such as the EFF and MK to form a government.
Early results suggested that should they hold up, the ANC’s support would fall to about 43% — a worst-case scenario, according to the financial sector.
The EFF and some elements in the MK are known to favour nationalisation of the economy, including banks and mines.
The country’s insurance majors Sanlam, Old Mutual, Discovery and Momentum also took a hit, shedding billions of rand in value.
The retailers did not fare any better, with Shoprite, TFG, Woolworth, Mr Price, Truworths, Spar and Pick n Pay all ending the day deep in the red, also losing billions in value.
These stocks, which are heavily influenced by SA’s economy and policy, also had one of their worst days since the Covid-19 pandemic.
Woolworths, which also released a downbeat profit forecast, bled 7.15% and TFG 6.95%.
Truworths was down 6%, Mr Price 4.31% and Pepkor 6.43%. Shoprite closed the day 4.06% weaker, while Pick n Pay shed 5.19% and Spar 1.8%.
Asief Mohamed, chief investment officer at Aeon Investment Management, said there were genuine concerns in the market that early results put MK party and EFF in the pound seats to determine who forms a new government.
“Banks and consumer-focused companies are particularly exposed to the domestic economy, and the potential formation of a coalition government with either the EFF or MK raises some concerns, hence the share price weakness of banks and consumer facing companies,” said Mohamed.
Unstable coalition
“More than two-thirds of shares listed on the JSE are less reliant on the local economy. These companies either export products or have a significant portion of their operations based offshore.
“However, the retail sector faces a growing challenge from online clothing retailers like Shein and Temu. Their app downloads have seen a significant increase over the past year, indicating intensifying competition,” said Mohamed.
Business Day reported on Monday that Cumesh Moodliar, who heads Investec’s SA business, said all indications were that the ANC would still have a big say on policy after the hotly contested general election.
“We have been following polling very closely from an SA perspective. Early indications appear to be that the ANC will, in some form or the other, still retain an election outcome that is positive for it,” said Moodliar.
“In other words, they will get either just over 50% or 45%-50%, which means that whatever coalition that will be formed, in our view, will be a coalition for economic stability.”
Deputy finance minister David Masondo told investors three weeks ago that President Cyril Ramaphosa’s reform agenda was at risk of stalling should the country be presided over by an “unstable coalition”.
Masondo, who doubles as chair of state asset management company the Public Investment Corporation (PIC), said this in an address to a group of investors at an event that was organised by Bank of America.
Bad outcome
John Biccard, portfolio manager of Ninety One Value Fund, said previously that a bad outcome for the market would be ANC support falling to about 40% and the party then choosing an EFF or MK alliance to secure a majority.
“We consider the chances of this happening to be quite low,” said Biccard.
“The ANC will need to get only 40% of the vote (50% probability in our view) and thereafter they would need to choose EFF or MK as their partner (20% probability in our view).
“We therefore see the probability of a bad outcome as only 10%, a stark contrast to what the market appears to be pricing in,” Biccard said last week.
Update: May 30 2024
This story has been updated with new information.
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