One year into a coalition government, SA Inc continues to benefit from improved sentiment, with the country’s stock market and benchmark bond sustaining their strong momentum despite persistent headwinds.
On Wednesday, the JSE all share index peaked at a record high of 97,094 points, having gained 27.73% over the past year. SA’s R2030 benchmark bond rallied recently, with the yield reaching a seven-year low of 8.55% last week.
“It is a combination of factors,” said Old Mutual investment strategist Izak Odendaal, “one of which is the government of national unity (GNU) and optimism around economic reform and fiscal consolidation”.
The outcome of last year’s election sparked a wave of optimism in the private sector, with business owners and investors hopeful that the GNU could create the stability needed to reignite long-term investment in the country.
“The R2030 bond yield saw a meaningful compression in the months following the GNU’s announcement, reflecting renewed confidence in SA’s fiscal path and political stability,” said TreasuryONE director Wichard Cilliers, with yields falling from about 10.5% in early June 2024 to below 9% by the final quarter.
In recent weeks, however, R2030 yields have been closer to 8.75%-9%, with some concerned that progress may have stalled.
“While the market welcomed the initial political compromise, concerns around implementation risk, fiscal discipline and the pace of structural reforms have kept the rally in check,” said Cilliers.
A range of political and economic headwinds have subsequently threatened to disrupt the rosy GNU outlook, beginning with fallouts over the government’s implementation of National Health Insurance, the Basic Education Laws Amendment Act and the Expropriation Act.
US elections were another hiccup, as the win by President Donald Trump caused the dollar to strengthen overnight, putting pressure on the rand.
Added to this was the controversial VAT hike proposed in finance minister Enoch Godongwana’s budget speech, which saw the tabling of this year’s budget postponed by two months.
As friction between members called into question the GNU’s sustainability, further pressure has come from trade wars and US tariffs, with business confidence decreasing in the second quarter of the year on trade uncertainty and logistics problems, according to the RMB/BER business confidence index.
The announcement of Trump’s sweeping “reciprocal” tariffs in early April saw the all share index plunge as much as 4.5% in one day, wiping off nearly R1-trillion in value.
The resultant erosion of confidence was evidenced by a plunge in the JSE’s food and drug retailers index over the first four months of the year.
Despite these challenges, the rand has remained relatively range bound, firming 5.8% since the start of the year, while the value of the JSE’s top 40 companies has risen 17.49%.
According to Odendaal, local financial markets have been supported by a weaker dollar as US policy credibility is eroded, as well as higher precious metals prices, both of which have kept the rand robust.
Precious metals and mining is by far the best performing JSE index since last year’s election, having gained 63.68% over the past 12 months.
Record gold prices have played a role in sustaining the rally, with the price of bullion rising 44% over the past year, driven by strong safe-haven demand stemming from policy uncertainty and mounting trade tension.
A recent uptick in platinum prices has provided further encouragement for the local industry, particularly given SA’s outsize role in global platinum supply.
Added to this is the prospect of SA moving to a lower inflation target, which would increase the real value of SA’s long bonds and potentially enable a lower path for interest rates.
Reserve Bank governor Lesetja Kganyago has long called for a tighter inflation target to align the country with peer economies, a move that seems increasingly likely to materialise.
After the monetary policy committee’s latest meeting earlier this month, Kganyago said the committee considered a scenario in which the target for inflation was within the 3% band, as opposed to the present 3%-6%.
“Since the formation of the GNU market sentiment towards SA has certainly improved, but the trajectory has been uneven, reflecting both local and global dynamics,” said Cilliers.
“The GNU provided a much-needed political tailwind to market sentiment, but the durability of this improvement now hinges on the delivery of real reforms.
“Markets remain constructive but cautious — investors want to see tangible progress on fiscal consolidation, SOE governance, and structural reforms to justify sustained tightening in bond spreads and further rand strength.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.