How Elections May Impact Markets in the Months Ahead

South Africa’s momentous elections will impact financial markets for months to come, we just can’t predict how. Even if an investor-friendly coalition is agreed in the next week, you can still expect plenty of ups and downs.

Foreign investors may dip in and out based on their risk appetite, but that’s rarely a wise investment approach. Our advice? See through the noise and stick to your long-term investment plan through the inevitable volatility.

Investors pin their hopes on an investor-friendly outcome

The elections have been and gone, and now we wait to hear the nature of the coalition that the ANC will form after not just losing its majority but only managing to muster a 40% share of the votes.

A lot has been written about the potential impact of elections on financial markets, but the reality is that it’s exceptionally hard to predict how investors will respond to election results in the medium- to long-term … Particularly when dealing with a game-changing election like this one.

South Africa’s election is the country’s most significant in the three decades since the end of apartheid. You would usually expect investors to be wary ahead of an election in which the ANC could lose its majority and possibly team up with the EFF or the MK. Instead, foreigners invested heavily in the bond market for the first time in years, and a week before the elections, the rand firmed to its strongest level of R18.07 to the dollar in 10 months.
The rand and the stock market lost some ground ahead of election day due to a shift in global investor sentiment rather than South African investor nerves, and post-election day, the rand has retreated to almost R19 to the dollar.

However, the bigger impact on financial markets is likely to come when the details of the coalition that will rule the country for the next five years is finalised.

What can investors expect?

Investec Wealth & Investment did some interesting analysis of the different scenarios and their likely impact on the economy and markets. While their report was published before the election, the scenarios they envisaged are still extremely relevant.

Best-case scenario for investors: ANC teams up with DA and/or IFP

As the vote came in below the lower end of the scale, the party may need more coalition partners, which risks changing the policy agenda. If there’s anything investors hate, it’s political upheaval and changing goalposts. Investors will want the new government to remain committed to rolling out existing policy plans in critical economic segments, such as energy, crime, and logistics.

As long as the ANC remains the main policy driver, possibly with some concessions, Investec sees the election outcome as positive for equities, bonds and the rand, albeit with some short-term volatility.

Worst case scenario for investors: ANC teams up with the EFF and/or MK

A coalition government that includes the EFF and/or MK would be negative across all asset classes because it would likely require major concessions from the ANC, including significant policy changes that result in fiscal deterioration, and these would significantly increase the country’s investment risk premium.

The bottom line

South Africa’s financial markets are primarily driven by global sentiment, and foreign investors typically come and go based on their appetite for risk, which can change quickly. So, you can expect heightened financial market volatility as the details of the coalition are announced and the new government beds down.

But that doesn’t mean that local investors should follow suit. Remember, it’s time in the market, not timing the market that generates the most wealth. 

If you have absolutely any concerns about your investment portfolio, give us a call.

Disclaimer – *The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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