Investing in South Africa during turbulent times
More people than ever in history will cast their vote this year with over 64 countries and the European Union set to hold elections in 2024. We know from experience that with elections comes uncertainty. With the South African national elections on the horizon, questions are rife around the possible outcomes and whether South Africa can remain investable.
The case for South Africa
Despite appealing valuations, we remain cautious on South Africa due to the relatively poor structural environment. The inability of government to implement required reforms is of concern to South African government bonds given the country’s debt trajectory, and equity markets need growth for returns to come through.
However, investing in any emerging market inherently has a higher level of risk. The question is ultimately whether these risks are being adequately compensated for. In South Africa, PPS Multi-Managers believe they are. Despite the structural issues, the country’s financial market is world-class, its private sector is robust and highly adaptable, and there is value to be found in its equity and bond markets.
That said, at PPS Investments we also believe that exposure in a portfolio should be appropriately sized, with a healthy allocation to foreign markets complementing the South African exposure. Risk should be actively managed through adequate diversification across asset managers and investment strategies.
What about the usual suspects
Apart from the elections, South Africans are facing challenges regarding reliable electricity and corruption. Considering these, how does one justify investing in South Africa?
These challenges should not be downplayed. However, they are not unique to South Africa. For example, parts of India, Australia and even the US have experienced loadshedding from time to time. Unfortunately, South Africa’s experience has been severe due to prolonged underinvestment in infrastructure, rather than growing pains. However, there have been positive developments on several fronts, even if urgency is lacking, and coordination with the private sector could be improved.
Corruption exists in all countries to varying degrees. As South Africans, we are constantly bombarded with negative news headlines. The bigger concern is whether the widespread negativity has already been reflected in asset prices. For the most part, at lot already is. Bear in mind that a “good” country could end up being a bad investment if the price paid is too high, and even a “bad” country can be a great investment if the price is right.
Clearly, there are significant constraints with electricity and logistics which our asset managers are navigating. Progress is not ideal; however, industry is working actively with the government to try to resolve many these constraints.
Looking at the elections
There are three main scenarios regarding the outcome of the elections for the ANC during the elections:
1. Win with a majority getting more than 50% of the vote
2. Win with a plurality with a small margin below 50%
3. Win with a plurality with a wide margin below 50%
The first scenario would continue the status quo. For the longest time this outcome has remained a certainty. However many sources claim that it will change this election. The ANC’s popularity has continued to decline over time due to poor governance and lack of service delivery, among many things.
It is important to note that the possibility of the ANC not achieving a majority is not a given. In the 2019 national election the ANC received 57.5% of the vote, which means that an almost 8% decline would be required to lose the majority. While election polls have indicated a wide range of outcomes, it is worth noting that these polls are often administered by partisan groups, each with their own agenda.
As the second scenario indicates, there appears to be a relatively strong possibility that the ANC may not achieve the outright majority they have enjoyed since the first fully democratic election in 1994. In this scenario, the ANC loses the majority by a small margin and forms a coalition government with one or more smaller parties, effectively maintaining overall control. As a result, policy outcomes affecting the private sector are unlikely to change significantly.
What appears to be of bigger concern is the third scenario where the ANC loses the majority by roughly 8% or more. This will likely require a coalition with one of the larger opposition parties and the fear is that government implementation then becomes even more constrained as the coalition party will have a greater voice in policy decisions. In this scenario, the possible coalition partners are the DA or the EFF, who have very different political philosophies.
Coalitions between the ANC and the EFF on municipal levels in the past have generally been short-lived due to infighting and there is reason to believe that this trend will continue at the national level should this outcome prevail..
Even if one is 100% certain as to the election outcome, and we’d argue all three outcomes are potentially still in play, it is not always obvious how one should position an investment portfolio to benefit from perfect foresight.
For example, if the ANC retains the majority (and that is not our base case), would the market have a positive or a negative reaction? It can be hard to say. On the one hand one could argue an ANC majority removes investor uncertainty and therefore should be positive; on the other hand, an ANC majority might prevent necessary reform and be ultimately perceived as negative.
How are we positioned?
The PPS Investments funds are circumspectly positioned in relation to South African asset classes, and locally we are only overweight SA cash. Given how much bad news is priced into South African assets, this could be a drag on performance if the election outcome is viewed positively, but we would wish to have greater confidence in the reform agenda before overweighting other SA assets. However, importantly, some of the underlying managers we appoint have become more positive on South African assets, and this could contribute to more consistent returns if markets are positively surprised.
Elections always bring about some uncertainty and there is likely to be additional volatility in markets leading up to the elections and as results are announced. It remains prudent to remain invested with asset managers that are able to navigate volatility successfully. At PPS Investments, we believe that South Africa will remain investable over this period and some opportunities will be presented.
PPS Investments Group is a subsidiary of Professional Provident Society Insurance Company Limited, a Licensed Insurer and Financial Services Provider. PPS Investments Group consists of the following authorised Financial Services Providers: PPS Investments (Pty) Ltd(“PPSI”), PPS Multi-Managers (Pty) Ltd(“PPSMM”) and PPS Investment Administrators (Pty) Ltd(“PPSIA”); and includes the following approved Management Company under the Collective Investment Schemes Control Act: PPS Management Company (RF) (Pty) Ltd (“PPS Manco”). Financial services may be provided by representative(s) rendering financial services under supervision. www.pps.co.za/invest
https://www.pps.co.za/investing-south-africa-during-turbulent-times