2024 Election postmortem

Terebinth Capital, manager of the PPS Defensive Fund, provides their view on the outcome of the South African elections.

Coming into the 2024 elections, the prevailing question was just how far support for the ANC has fallen. With all the votes counted, the ANC finished with only 40.2% of the vote, down from 57.5% at the previous election. Importantly, their poor showing places them well below the market’s expectations of 45% - 47%, which increases uncertainty.

A changing political landscape
The biggest surprise was the significant support for the MKP, not only in KZN but also in Mpumalanga and Gauteng. While both the EFF and MKP attempted to court ANC voters to their respective camps, the MKP was decidedly more successful as they debuted in 3rd place with 14.58% of the vote. While the PA was seen as a potential threat to the DA, the Western Cape remains in their control. While relative support for the DA has improved compared to 2019, the source of their gain appears to be from parties like the VF+.

The ANC’s poor showing will make for more complicated coalition negotiations. It is no longer possible that the ANC will get away with only a few social democratic parties to form a majority government, and will now need to look at the larger parties. 

The coalition with the larger parties would either be reformist or populist, which would have a substantial market and policy impact, either way. From a longer-term perspective, the functioning and durability of the coalition will be important for policy formation and implementation, and so could lead to renewed uncertainty and volatility down the line.

The upside scenario sees either a formal coalition with the DA, or a minority ANC government with an informal agreement with the DA. This would be market positive, given the expectation of stronger checks and balances, as well as accelerated reforms.

The downside scenario sees the ANC joining forces with the MKP, which would increase the risk of populist measures, fiscal laxity and renewed corruption. Based on political analysts’ views, this has a lower likelihood given the relative support within the ANC NEC for Ramaphosa and the antagonism between the now larger Ramaphosa faction and the pro-Zuma faction. An alternative would be for the ANC to join forces with the EFF, which would have a similarly negative market outcome.

Investment Impact
The election results will most likely cause uncertainty to persist, with renewed risk premia across bonds, Forex and equities in the short term. Under a favourable reformist coalition, there is scope for a notable rally once uncertainty recedes. However, should the adverse populist scenario play out, we would expect substantial further weakness in SA asset prices.

From a risk management perspective, we are most concerned about an outright negative outcome where the ANC forms a coalition with either the EFF or the MKP. While most analysts still attribute a relatively low probability to this outcome, it should not be ignored. The other risk is lingering uncertainty, which would be reflected across all SA asset prices. As such, this is not a relative call between SA asset classes, but between offshore and domestic exposure. 

The PPS Defensive Fund has been overweight fixed income/income assets, neutral or underweight risk assets, and underweight offshore. Ahead of the elections the fund increased its offshore exposure to neutral by going long USD, which was also a partial hedge for domestic fixed-rate bond position. We believe an adverse scenario would be negative for SA assets across the board, but that fixed-rate bonds are most at risk given the read-through to fiscal policy and the government debt trajectory. The opposite also holds: bonds are likely to gain notably from a reformist coalition given reduced risk of fiscal profligacy. 

Given elevated uncertainty near term, we will not be making major adjustments to the asset allocation. The portfolio has broad-based exposure to benefit from a positive outcome, while it has 12% in cash and 22% in short-dated ILBs, which combined should assist the portfolio to weather some of the near-term volatility in markets. 

We are monitoring levels on the rand and yields closely regarding repatriating offshore cash or to adjust our nominal bond exposure based on incoming coalition information.

 

Disclaimer

2024 Election postmortem by Terebinth Capital
Terebinth Capital, manager of the PPS Defensive Fund, provides their view on the outcome of the South African elections.

Coming into the 2024 elections, the prevailing question was just how far support for the ANC has fallen. With all the votes counted, the ANC finished with only 40.2% of the vote, down from 57.5% at the previous election. Importantly, their poor showing places them well below the market’s expectations of 45% - 47%, which increases uncertainty.

A changing political landscape
The biggest surprise was the significant support for the MKP, not only in KZN but also in Mpumalanga and Gauteng. While both the EFF and MKP attempted to court ANC voters to their respective camps, the MKP was decidedly more successful as they debuted in 3rd place with 14.58% of the vote. While the PA was seen as a potential threat to the DA, the Western Cape remains in their control. While relative support for the DA has improved compared to 2019, the source of their gain appears to be from parties like the VF+.

The ANC’s poor showing will make for more complicated coalition negotiations. It is no longer possible that the ANC will get away with only a few social democratic parties to form a majority government, and will now need to look at the larger parties. 

The coalition with the larger parties would either be reformist or populist, which would have a substantial market and policy impact, either way. From a longer-term perspective, the functioning and durability of the coalition will be important for policy formation and implementation, and so could lead to renewed uncertainty and volatility down the line.

The upside scenario sees either a formal coalition with the DA, or a minority ANC government with an informal agreement with the DA. This would be market positive, given the expectation of stronger checks and balances, as well as accelerated reforms.

The downside scenario sees the ANC joining forces with the MKP, which would increase the risk of populist measures, fiscal laxity and renewed corruption. Based on political analysts’ views, this has a lower likelihood given the relative support within the ANC NEC for Ramaphosa and the antagonism between the now larger Ramaphosa faction and the pro-Zuma faction. An alternative would be for the ANC to join forces with the EFF, which would have a similarly negative market outcome.

Investment Impact
The election results will most likely cause uncertainty to persist, with renewed risk premia across bonds, Forex and equities in the short term. Under a favourable reformist coalition, there is scope for a notable rally once uncertainty recedes. However, should the adverse populist scenario play out, we would expect substantial further weakness in SA asset prices.

From a risk management perspective, we are most concerned about an outright negative outcome where the ANC forms a coalition with either the EFF or the MKP. While most analysts still attribute a relatively low probability to this outcome, it should not be ignored. The other risk is lingering uncertainty, which would be reflected across all SA asset prices. As such, this is not a relative call between SA asset classes, but between offshore and domestic exposure. 

The PPS Defensive Fund has been overweight fixed income/income assets, neutral or underweight risk assets, and underweight offshore. Ahead of the elections the fund increased its offshore exposure to neutral by going long USD, which was also a partial hedge for domestic fixed-rate bond position. We believe an adverse scenario would be negative for SA assets across the board, but that fixed-rate bonds are most at risk given the read-through to fiscal policy and the government debt trajectory. The opposite also holds: bonds are likely to gain notably from a reformist coalition given reduced risk of fiscal profligacy. 

Given elevated uncertainty near term, we will not be making major adjustments to the asset allocation. The portfolio has broad-based exposure to benefit from a positive outcome, while it has 12% in cash and 22% in short-dated ILBs, which combined should assist the portfolio to weather some of the near-term volatility in markets. 

We are monitoring levels on the rand and yields closely regarding repatriating offshore cash or to adjust our nominal bond exposure based on incoming coalition information.

2024 Election postmortem by Terebinth Capital
Terebinth Capital, manager of the PPS Defensive Fund, provides their view on the outcome of the South African elections.

Coming into the 2024 elections, the prevailing question was just how far support for the ANC has fallen. With all the votes counted, the ANC finished with only 40.2% of the vote, down from 57.5% at the previous election. Importantly, their poor showing places them well below the market’s expectations of 45% - 47%, which increases uncertainty.

A changing political landscape
The biggest surprise was the significant support for the MKP, not only in KZN but also in Mpumalanga and Gauteng. While both the EFF and MKP attempted to court ANC voters to their respective camps, the MKP was decidedly more successful as they debuted in 3rd place with 14.58% of the vote. While the PA was seen as a potential threat to the DA, the Western Cape remains in their control. While relative support for the DA has improved compared to 2019, the source of their gain appears to be from parties like the VF+.

The ANC’s poor showing will make for more complicated coalition negotiations. It is no longer possible that the ANC will get away with only a few social democratic parties to form a majority government, and will now need to look at the larger parties. 

The coalition with the larger parties would either be reformist or populist, which would have a substantial market and policy impact, either way. From a longer-term perspective, the functioning and durability of the coalition will be important for policy formation and implementation, and so could lead to renewed uncertainty and volatility down the line.

The upside scenario sees either a formal coalition with the DA, or a minority ANC government with an informal agreement with the DA. This would be market positive, given the expectation of stronger checks and balances, as well as accelerated reforms.

The downside scenario sees the ANC joining forces with the MKP, which would increase the risk of populist measures, fiscal laxity and renewed corruption. Based on political analysts’ views, this has a lower likelihood given the relative support within the ANC NEC for Ramaphosa and the antagonism between the now larger Ramaphosa faction and the pro-Zuma faction. An alternative would be for the ANC to join forces with the EFF, which would have a similarly negative market outcome.

Investment Impact
The election results will most likely cause uncertainty to persist, with renewed risk premia across bonds, Forex and equities in the short term. Under a favourable reformist coalition, there is scope for a notable rally once uncertainty recedes. However, should the adverse populist scenario play out, we would expect substantial further weakness in SA asset prices.

From a risk management perspective, we are most concerned about an outright negative outcome where the ANC forms a coalition with either the EFF or the MKP. While most analysts still attribute a relatively low probability to this outcome, it should not be ignored. The other risk is lingering uncertainty, which would be reflected across all SA asset prices. As such, this is not a relative call between SA asset classes, but between offshore and domestic exposure. 

The PPS Defensive Fund has been overweight fixed income/income assets, neutral or underweight risk assets, and underweight offshore. Ahead of the elections the fund increased its offshore exposure to neutral by going long USD, which was also a partial hedge for domestic fixed-rate bond position. We believe an adverse scenario would be negative for SA assets across the board, but that fixed-rate bonds are most at risk given the read-through to fiscal policy and the government debt trajectory. The opposite also holds: bonds are likely to gain notably from a reformist coalition given reduced risk of fiscal profligacy. 

Given elevated uncertainty near term, we will not be making major adjustments to the asset allocation. The portfolio has broad-based exposure to benefit from a positive outcome, while it has 12% in cash and 22% in short-dated ILBs, which combined should assist the portfolio to weather some of the near-term volatility in markets. 

We are monitoring levels on the rand and yields closely regarding repatriating offshore cash or to adjust our nominal bond exposure based on incoming coalition information.

2024 Election postmortem by Terebinth Capital
Terebinth Capital, manager of the PPS Defensive Fund, provides their view on the outcome of the South African elections.

Coming into the 2024 elections, the prevailing question was just how far support for the ANC has fallen. With all the votes counted, the ANC finished with only 40.2% of the vote, down from 57.5% at the previous election. Importantly, their poor showing places them well below the market’s expectations of 45% - 47%, which increases uncertainty.

A changing political landscape
The biggest surprise was the significant support for the MKP, not only in KZN but also in Mpumalanga and Gauteng. While both the EFF and MKP attempted to court ANC voters to their respective camps, the MKP was decidedly more successful as they debuted in 3rd place with 14.58% of the vote. While the PA was seen as a potential threat to the DA, the Western Cape remains in their control. While relative support for the DA has improved compared to 2019, the source of their gain appears to be from parties like the VF+.

The ANC’s poor showing will make for more complicated coalition negotiations. It is no longer possible that the ANC will get away with only a few social democratic parties to form a majority government, and will now need to look at the larger parties. 

The coalition with the larger parties would either be reformist or populist, which would have a substantial market and policy impact, either way. From a longer-term perspective, the functioning and durability of the coalition will be important for policy formation and implementation, and so could lead to renewed uncertainty and volatility down the line.

The upside scenario sees either a formal coalition with the DA, or a minority ANC government with an informal agreement with the DA. This would be market positive, given the expectation of stronger checks and balances, as well as accelerated reforms.

The downside scenario sees the ANC joining forces with the MKP, which would increase the risk of populist measures, fiscal laxity and renewed corruption. Based on political analysts’ views, this has a lower likelihood given the relative support within the ANC NEC for Ramaphosa and the antagonism between the now larger Ramaphosa faction and the pro-Zuma faction. An alternative would be for the ANC to join forces with the EFF, which would have a similarly negative market outcome.

Investment Impact
The election results will most likely cause uncertainty to persist, with renewed risk premia across bonds, Forex and equities in the short term. Under a favourable reformist coalition, there is scope for a notable rally once uncertainty recedes. However, should the adverse populist scenario play out, we would expect substantial further weakness in SA asset prices.

From a risk management perspective, we are most concerned about an outright negative outcome where the ANC forms a coalition with either the EFF or the MKP. While most analysts still attribute a relatively low probability to this outcome, it should not be ignored. The other risk is lingering uncertainty, which would be reflected across all SA asset prices. As such, this is not a relative call between SA asset classes, but between offshore and domestic exposure. 

The PPS Defensive Fund has been overweight fixed income/income assets, neutral or underweight risk assets, and underweight offshore. Ahead of the elections the fund increased its offshore exposure to neutral by going long USD, which was also a partial hedge for domestic fixed-rate bond position. We believe an adverse scenario would be negative for SA assets across the board, but that fixed-rate bonds are most at risk given the read-through to fiscal policy and the government debt trajectory. The opposite also holds: bonds are likely to gain notably from a reformist coalition given reduced risk of fiscal profligacy. 

Given elevated uncertainty near term, we will not be making major adjustments to the asset allocation. The portfolio has broad-based exposure to benefit from a positive outcome, while it has 12% in cash and 22% in short-dated ILBs, which combined should assist the portfolio to weather some of the near-term volatility in markets. 

We are monitoring levels on the rand and yields closely regarding repatriating offshore cash or to adjust our nominal bond exposure based on incoming coalition information.
 

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