Last week I started our in-house morning meeting highlighting how good local markets seemed to be having it.
The rand was trading at below R18.10/$, a level last reached in July 2023, the all-share index traded around a high of over 80,000 points, and bond yields had fallen by 60 basis points from their late April highs. The narrative that emerged in the wake of this bullish momentum was that the market was more relaxed about election outcomes.
Polls did indeed show the ANC gaining ground as its campaign gained momentum as the elections got closer. This helped anchor the “policy continuity” trade. However, this was far from the full story. The bulls were likely even more encouraged by what was happening globally. The outlook for global growth has improved, and with it SA’s term of trade. Citi Bank’s commodities terms of trade index for SA shows a 25% improvement since March.
Financial markets have moved to recognise the building momentum in global demand. The JPMorgan global manufacturing purchasing managers’ index (PMI) has been above 50 in 2024 to date, which suggests ongoing, though modest, expansion in global economic activity. The index was in contraction territory from the third quarter of 2022. China is still a mess, but it is stable and improving on the margins. Activity there appears to be off its 2023 lows, and both imports and exports are recovering.
The prospect of rate cuts at big central banks, and thus further improvement in global demand, is helping to bolster the case for hope, buoying risky assets. Markets are discounting the start of easing by the European Central Bank in June, and the US Federal Reserve is seen cutting by the end of the year.
Markets have pulled back somewhat over the past week, but the path of least resistance for local financial assets over the next few weeks and months is towards strength.
The only systemic central bank expected to hike is the Bank of Japan. Ten of the 38 central banks tracked by the Bank for International Settlements have already cut rates this year. Financial conditions could remain supportive for a few more months. This is the environment in which election results will be delivered this week.
Local and foreign investors are optimistic about SA’s investment case, but reluctant to invest ahead of elections. There is thus room for inflows once the elections are behind us, especially if, as we believe, the ANC administration retains control of macroeconomic policy levers.
Markets have pulled back somewhat over the past week, but the path of least resistance for local financial assets over the next few weeks and months is towards strength. There is of course the possibility of an election upset, which could scupper my bullish case. Even then, the sell-off could still be managed if a majority ANC government gave the market credible assurance of policy continuity.
The extent to which assets rally after the election will depend on a few things. On the local front, load-shedding must remain mostly gone. Many investors welcome the grid stability that we have experienced in the past few months but wonder whether Eskom has been holding off on maintenance or burning diesel to keep the lights on. We don’t think it has, but we expect low-intensity load-shedding could come back as we get into the summer and planned maintenance at Eskom picks up. It is critical for markets that load-shedding remains contained.
Economic developments in the US also remain a risk. If the economy slips into recession, as it still could, risky assets would be undermined and SA assets suffer in turn. US inflation must remain contained, lest Fed hike fears start to emerge. Then there is the US election, which should come into focus as we head into year end.
Risks aside, the terrain for SA assets after the election is constructive, and positive momentum could be substantial. Unlike the “Ramaphoria” strength that we saw after the 2017 ANC elective conference, this one has fundamentals to back it. I believe SA assets are on track for enduring gains, but only if we maintain policy momentum.
• Lijane is global markets strategist at Standard Bank CIB.
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