Elections 2019: How to position your portfolio

by / Tuesday, 07 May 2019 / Published in Aftree Beplanning

South Africans will be voting on Wednesday, 8 May, in what is probably the most important general election since the dawn of democracy in 1994. While there is little doubt that the ANC will emerge victoriously, a more important question for SA and for investors is the margin of that victory. Below, CEO of Anchor Capital – Peter Armitage, discuss the current state of the ruling party since Cyril Ramaphosa’s ascendancy to the presidency and how it will affect financial markets.

 

Elections 2019: How to position your portfolio

Our base case is for a relatively strong ANC election win in May and a mandate for President Cyril Ramaphosa to continue with his reform and anti-corruption drive. This will improve investor confidence and should see strong inflows into the South African (SA) equity market. Recent market performance has indicated support for this view. However, this is by no means a certainty and risks are elevated. In addition, Ramaphosa will need to show strong leadership and take meaningful actions in order to reinforce confidence. Different election outcomes could have vastly different equity market, growth and currency consequences. We are hence maintaining meaningful exposure to SA Inc. shares but retaining a diversified portfolio. Importantly, investors should be ready to react as the SA political drama unfolds, with a close eye on the balance of power in the provinces. SA has serious structural issues and the advances made in solving these are equally important. It should also be borne in mind that many of the factors impacting equity markets are global in nature and the SA political outcome is just one of the contributors. However, various segments of the SA market could perform very differently in varying scenarios.

 

The ANC gets 58%-plus of the vote (biggest probability): In our view, the most likely outcome and also our base case. If this happens the current ‘repair’ scenario maintains momentum, with Ramaphosa emboldened and seen as having received the required mandate from the voters to solidify his position and steer ahead with his anti-corruption and growth agenda unfettered. Ramaphosa assembles a new cabinet, with few Zuma cronies or compromised individuals. He makes headway in managing divisions within the ANC, gaining the support of the ANC caucus and the NEC, as he intensifies the fight against corruption and state capture. This, in turn, will be positive for the local economy and we are likely to see more inflows of FDI and local investment into SA as ANC policies are (hopefully) clarified, especially those related to EWC, the nationalization of the SARB etc. A more certain future overall, with Ramaphosa perhaps serving two terms, boosting the JSE (bar any external offshore factors) and the rand strengthening.

 

Rand vs US dollar at year-end:                            R13.30/$1

2020 GDP growth rate:                                          2.5%

JSE 12-month return:                                           15%-plus

 

Equity positioning: High exposure to SA Inc. shares, especially the quality counters where foreigners take their exposure: FirstRand, Standard Bank, The Foschini Group, DisChem, Bidvest, RMI, AVI, Coronation, Shoprite and Clicks. Property shares are likely to do well. The more cyclical counters such as Motus, Imperial and Super Group could also rise materially as expectations of economic growth improve. Rand-hedge shares would likely underperform with a strengthening currency.

 

Conclusion

SA turned a corner when Cyril Ramaphosa was elected ANC president at the party’s elective conference in December 2017. Many positive moves have been made as discussed earlier but, not surprisingly, there is strong opposition within a faction of the ANC against moves to curb corruption and revive embattled SOEs. Our base case is for this direction to be sustained and this could see underweight foreign fund managers direct financial flows back into the SA market.

We continue to have a positive stance on local equities, but the future is far from certain and, as seen above, various scenarios are possible following the outcome of the May general election. Investors in the SA market are going through emotional turmoil at present, with local news getting worse, although the global backdrop is proving to be supportive. Hence, sectoral exposure is increasingly critical, and these could be materially differentiated over the coming months. However, an emboldened Ramaphosa could lead to more certainty as well as more definitive policy moves which are likely to boost a flagging SA economy.

 

Source: Newsletter – Anchor Capital

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