Global financial markets have seen significant volatility so far in 2024, fuelled by election-related jitters.
The ANC lost its majority at the general election in May, ushering in a new era of coalition politics represented by the government of national unity (GNU) after three decades of ANC dominance.
Meanwhile, anxiety is building ahead of US elections in November.
Business Day caught up with IG senior market analyst Shaun Murison, to make sense of the effects of political events on the local and global financial markets.
What are the risks relating to the GNU?
Political fallout within the GNU provides risk to the cabinet and portfolios therein. Fallout, not just within the GNU but also within the ruling ANC, which still has internal factions, provides further risk to much-needed economic reform. While local markets have rallied, they continue to price in a risk premium, evidenced by valuations on much of SA Inc still trading at discounts to what we saw at the beginning of “Ramaphoria”'.
What are investors looking for from the GNU?
Investors will be looking for increased oversight and reform in a number of key portfolios, including public works, transport, electricity, trade and industry, water and sanitation, and finance. They expect these departments will address infrastructure problems and hopefully see more fixed capital allocations feeding into improving the economic health of the country, particularly growth and employment.
The US is going to the polls in November. As things stand, what are likely scenarios and their effects on the markets?
Markets have been optimistic, with key US equity benchmarks extending 2023’s gains and trading well into new territory. A lot of these gains can be attributed to interest in AI and cloud computing, which is driving growth primarily in the tech sector, though US election years are historically positive for equity markets.
Polls suggest Donald Trump has a slight lead. A Trump win will likely lead to more deregulatory and tax-cut initiatives favouring the financial sector, some of which might already have started to be priced in after the first presidential debate. Companies with exposure to China could face headwinds because of trade wars, including the likes of Tesla and Nvidia. Republican policies would also likely support the defence and oil sectors.
A Biden victory could mean strict regulations that would be negative for financial counters and pharmaceutical manufacturers. The current president’s support for cleaner energy is likely to bode well for electric vehicle producers.
In this heightened volatile market environment, which assets, sectors and companies are you bullish about, and why? And which ones are you not too keen on?
Currently, we think that there is potential for banking, retail and healthcare stocks to rally further, and at the very least these companies could be viewed as a hold. These counters are beneficiaries of improved investor confidence from the election outcomes, and stand to gain if the path to economic reform and policy certainty manifest. Major banking counters in particular offer the potential for further growth while offering good yields. Gold stocks are perhaps looking less favourable with much of the sector now trading above what is deemed in consensus longer-term fair value.
The mining sector is quite shaky, with a number of mining giants having gone through a retrenchment or restructuring phase. Can you give us a general picture of the factors at play in the sector, and the outlook?
The mining sector remains at the mercy of Chinese demand and commodity price cycles, which means a high level of volatility in earnings. Coal prices have been depressed and iron ore prices are trading near cyclical lows. Platinum group metals have traded mixed though they started the year on a low base, while gold and copper have managed to touch new highs in 2024. Mining production numbers have been weak across most metals.
We are starting to see some consolidation in the industry with Anglo American looking to unbundle some of its assets.
Gold shares are perhaps trading ahead of fair value, while some of the platinum miners might be offering relative value if we consider expectations of a supply deficit to demand in the precious metal. Copper appears to be a commodity in demand as evidenced by the bid by BHP for Anglo American in search of these assets. The copper story bodes well for a number of these diversified miners, though lower iron ore prices, which are material to earnings, continue to weigh.
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