Having passed the 100-day mark in early October, South Africa’s new Government of National Unity (GNU) has made some progress in key ministries. However, crucial building blocks are still outstanding, and until these are put in place, investors will likely remain cautious about the country’s future. The government's biggest short-term priority must be to approve the 2024-29 Medium-Term Development Plan (MTDP) because this will finalise ministerial performance contracts and, ideally, make them publicly available for scrutiny.
Pictured: Noeriniche Apples - Quantitative Analyst at Prescient Investment Management
An unprecedented act of collaboration set the tone for SA’s future
In a landmark political shift, South Africa’s recent national election delivered a blow to the long-standing dominance of the African National Congress (ANC), which lost its majority for the first time. This unprecedented development left many citizens in suspense, wondering what would come next.
Out of the political uncertainty, a groundbreaking coalition emerged: the Government of National Unity (GNU), formed by an extraordinary alliance of 10 political parties. Most notably, it brought together two historic rivals, the ANC and the Democratic Alliance (DA), alongside the Patriotic Alliance, Inkatha Freedom Party, GOOD, Pan Africanist Congress of Azania, Freedom Front Plus, United Democratic Movement, Al Jama-ah, and Rise Mzansi.
This unprecedented act of collaboration responds directly to the citizens’ calls for unity and partnership in tackling the nation’s most pressing challenges. Together, they have committed to prioritising three strategic areas over the next five years: fostering inclusive economic growth and job creation, addressing poverty and the high cost of living, and building a capable, ethical, and developmental state.
GNU must prioritise transparency
As the GNU marked its first 100 days in early October, the crucial step of signing ministerial performance contracts had yet to be taken. Their finalisation is contingent upon the approval of the 2024-29 Medium-Term Development Plan (MTDP), a process anticipated to conclude by the end of October.
The uncertainty surrounding whether the ministerial performance agreements will be available for public scrutiny raises significant concerns. These agreements are essential not only for holding ministers accountable but also for ensuring that their objectives align with the expectations of the South African populace.
Within the coalition, the DA has emerged as a vocal proponent for the public disclosure of ministerial performance assessments. Although the DA is no longer merely a cynical outsider, it still faces considerable challenges in securing the necessary backing from its coalition partners, many of whom may prioritise political stability over transparency. As a result, the future of these performance agreements remains uncertain, reflecting a broader tension within the GNU regarding accountability and governance.
At Prescient Investment Management, we maintain our approach of systematic investing, and do not allow noise to influence our investment process. We look at facts and keep a neutral view of politics.
Without transparent reporting on ministerial performance, evaluating the GNU’s achievements during its initial days largely relies on market performance. Since the formation of the GNU, the South African stock market has experienced a notable rally, signalling some investor optimism. However, attributing these rallies solely to the GNU is challenging, as recent downward-trending CPI prints have initiated a rate-cutting cycle, resulting in a risk on the financial market environment. Additionally, news of stimulus packages in China aimed at reviving their economy has significantly boosted South Africa’s market. Figure 1 shows that the Price/Earnings Ratio (or P/E ratio) for the FTSE/JSE All Share (JALSH) Index continues to trade below its historical median. In contrast, Figure 2 indicates that the P/E ratio for the MSCI Emerging Markets (MXEF) Index has shown an upward trend, highlighting that South Africa's stock market remains one of the emerging markets with the most depressed valuations.
Source: Prescient Investment Management, Bloomberg (as at 14 October 2024)
Source: Prescient Investment Management, Bloomberg (as at 14 October 2024)
Investors optimistic but maintain a wait-and-see approach
Prescient Investment Management, employs a comprehensive approach to measuring investor sentiment, utilising various factors that reflect broader market trends, which suggests that, while bond investors are displaying a sense of optimism (Figure 4), equity investors remain cautious and are taking a wait-and-see approach (Figure 3). Our analysis incorporates equity market volatility, foreign exchange fluctuations, and bond market movements across several global markets, alongside emerging market flows and spreads.
Source: Prescient Investment Management, Bloomberg (as at 14 October 2024)
It will be particularly interesting to monitor how investor sentiment evolves as the GNU approaches its one-year mark, especially if there are shifts in policy direction that deviate from continuity. Overall, there are still some concerns over the GNU’s long-term durability.
Source: Prescient Investment Management, Bloomberg (as at 14 October 2024)
Looking forward, a gauge of the GNU’s effectiveness will be its ability to stimulate sufficient economic growth to generate jobs. A market that is still suffering in South Africa is the labour market and economic experts generally concur that South Africa needs a minimum annual growth rate of 3% to effectively absorb the approximately half a million individuals entering the job market each year. Falling short of this target could further exacerbate the already high unemployment rates, leaving many South Africans without opportunities.
Current projections suggest that unless something significant bolsters economic growth, the country will likely stagnate within a growth range of 1% to 2% over the next three years, posing significant challenges. Considering these challenges, it is crucial for the GNU to rethink and recalibrate its economic strategy to spur robust growth and job creation, as there is currently not much optimism around employment growth. The government must explore innovative solutions and foster an environment conducive to investment and entrepreneurship.
Although there is some optimism regarding investor confidence, the P/E ratio for South African equities indicates that more needs to be done. This optimism can quickly wane when reality sets in. Recent economic reforms, such as over 200 days without power cuts and modest improvements in national ports and rail, are essential for sustaining investor sentiment. These positive developments could encourage foreign investors to regain trust in South Africa’s potential. Additionally, implementing ministerial performance contracts and ensuring accountability will be crucial for the GNU’s success. However, as a systematic investment house, our views are data-driven and not influenced by the actions of the GNU. Currently, we hold a moderately positive outlook on South African equities while maintaining a neutral stance on South African bonds and will continue to monitor economic indicators closely.
Disclaimer
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Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612).Please note that there are risks involved in buying or selling a financial product, and past performance of a financial product is not necessarily a guide to future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. There is no guarantee in respect of capital or returns in a portfolio. No action should be taken on the basis of this information without first seeking independent professional advice. Graphs are provided for illustrative purposes only.
