Asset allocators are hedging against a potential EFF-ANC coalition after the election, fearing that a partnership between the two parties could result in capital outflows.
Jason Swartz, portfolio manager at Old Mutual Investment Group (OMIG), said asset managers and investors were on edge and eager to see what policy shifts the SA elections could usher in. These shifts could have a notable influence on the market’s risk and return dynamics.
“We would like to see institutions like the central bank, National Treasury and the Reserve Bank retain their independence following the elections, and that the country’s fiscal and monetary policy position remains orthodox,” Swartz said.
“International investors, however, also remain concerned about certain election outcomes, particularly an ANC-EFF tie-up due to the latter’s radical approach to land reform and the independence of the central bank.
“The market reaction to an EFF coalition with the ANC could be disastrous from a risk premium perspective, and we would see that reflected in the rand and in capital outflows. Therefore, this is something that asset managers are actively hedging against.”
SA’s largest asset manager earlier this year said the negative risk would be for the ANC to join with the EFF, with economic policy shifting quite radically to the left in this scenario.
Credible polls have predicted the ANC losing outright power for the first time, with coalition governments at national and provincial levels on the cards.
The EFF, DA, IFP and Jacob Zuma’s MK party are likely to emerge as king makers, particularly if the ANC’s support plunges below 45%.
Swartz said that while it was largely expected that the ANC would lose its majority, how far support for the ruling party would fall below the critical 50% level and what the post-election coalition landscape would look like were key questions.
“Most asset managers are thinking about their positioning in domestic SA-facing equity and whether to remain overweight with SA equities or SA bonds. We need to know where we hedge these positions or under what scenarios we might wish to take some profit from a cyclical perspective,” he said.
Risk premium
“Investors that are not prepared to embrace or accept the risk premium in SA equities could consider adding exposure to global industrials or global defensives.”
OMIG, which has more than R600bn assets under management, is also looking at the US elections, set for November, which might herald the return of Donald Trump as president, unseating Joe Biden.
Swartz said the outcome could be one of the most defining moments in US democracy. “Biden’s economic policy has focused on spending to support infrastructure and jobs — Trump is likely to reintroduce his ‘America first’ focus by cutting taxes, deregulation and higher tariffs to target China imports.
“The former’s policy will continue to run the economy hot while the latter’s policy would favour US equities but negatively impact global supply chains.”
BMI, a subsidiary of Fitch, will hold a webinar in May to discuss its outlook for SA’s general elections.
The research firm shared its views on SA’s election ahead of the webinar, and said that while it expected the ANC to lose its majority, the party was likely form a coalition with smaller parties, allowing it to remain the main policy driver.
“However, we continue to flag three alternative scenarios: the ANC scraping a slim majority, an ANC-EFF coalition, or a win by the opposition coalition, the multiparty charter,” BMI said. “While any of the coalition groupings will pose headwinds to policymaking ... we flag that an ANC-EFF coalition would likely result in a significantly adverse market reaction.”
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