Will the Market Spark Another Ramaphosa Rally?

Will the Market Spark Another Ramaphosa Rally?
6:19
Published on: Jun 19, 2024 12:00:00 PM

EasyAssetManagement reports on the potential resurgence of the South African stock market, drawing parallels to the historic "Ramaphosa Rally" of 2017. 



What is the Ramaphosa Rally?
In late 2017, a surprise political victory led to a surge in the South African stock market (MSCI SA) by 24% (measured in USD) over two months. This outperformed other emerging markets (EM) by 15%. The South African market (USD terms) rose more than the local currency (ZAR), and certain sectors like Banks and Retail benefitted the most.


Market movements following the election have been intriguing. Despite a weaker ZAR and the Top40 index closing below pre-election levels on Friday, key domestic sectors exhibited gains.
  • Coalition government on the horizon: The announcement by the DA to accept cabinet positions proportionally to their parliamentary presence strengthens the prospect of a coalition government.

  • Market optimism prevails: While the final list of ministers is yet to be revealed, the market anticipates a positive response from investors. This sentiment draws parallels to the "Ramaphosa rally" of 2017-2018, which witnessed a 24% rise in the MSCI index (USD terms).

  • Anticipated market trends: Similar market dynamics are expected to unfold, potentially including:
    1. Outperformance of domestic stocks compared to offshore earnings.
    2. Superior returns for high-beta stocks (more volatile) relative to low-beta stocks (less volatile).
The market's reception of the "Ramaphosa comparison" is twofold. On the positive side, it evokes memories of a significant stock market rally during President Ramaphosa's previous term. However, there's also a sense of caution. The past rally was fuelled by short-lived optimism that failed to translate into lasting economic improvements

The market priced in expectations of strong dollar earnings growth that never materialized. The new government of national unity (GNU) now faces the challenge of enacting policies that deliver on the "two-twos" - achieving two consecutive years of GDP growth exceeding 2%. This sustained growth is critical to generate long-term increases in dollar earnings and justify a permanent market revaluation, as opposed to a temporary surge.

While the current view on the South African stock market is optimistic, markets acknowledge it's a short-term perspective with aspirations for a long-term shift. This optimism is driven by a confluence of factors.

Firstly, South Africa has witnessed a prolonged period of foreign capital outflows, coupled with domestic institutional investors holding historically low levels of domestic equities. This trend suggests a potential reversal, with a surge of investment inflows into South African stocks in the near future. This positioning creates a favourable environment for equity trading.

Secondly, the market appears undervalued. Despite a decline in real GDP per capita for most of the past decade, valuations for South African equities have fallen, and the MSCI South Africa Index has traded below its average price-to-earnings ratio for the past five years.

Even if some investors remain unconvinced about a long-term turnaround, the sheer lack of sellers compared to potential buyers could drive the market higher in the near term. This is further supported by the current 12-month forward PE ratio being significantly below both the five-year and ten-year averages.

Beyond the recent political developments, there are positive economic factors supporting South Africa's prospects. Notably, the country has achieved a significant milestone – over 80 consecutive days without load-shedding. This improvement is attributed to several contributors.
  • Reduced reliance on emergency backup power: Lower diesel usage indicates a decrease in dependence on emergency generators.

  • Shifting energy consumption: Limited demand on Eskom, the national power utility, is likely due to factors like increased private solar panel installations.

  • Improved Eskom capacity: A rise in Eskom's Energy Availability Factor (EAF) suggests progress in fixing existing coal plants and potentially adding new generation capacity.
Additionally, the government has made headway on long-standing infrastructure challenges. These include reforms in the ports and rail sectors, such as granting third-party access to rail networks, procuring new locomotives, and involving the private sector in port terminal operations. These ongoing reforms could provide a positive tailwind for the new government's economic agenda.

The market outlook is also cautiously optimistic. Financial markets currently anticipate three interest rate cuts from the SARB by mid-2025. Furthermore, there's speculation of potential additional easing measures if the South African Rand strengthens.

While the outlook for South Africa is currently positive, there are several considerations that could dampen this sentiment in the near future.
  • Uncertainties surrounding the new government: The lack of a finalized cabinet list and the relative novelty of a coalition government structure (GNU) in South Africa raise concerns about potential delays or instability in implementing reforms. Additionally, the allocation of ministerial positions, particularly for the DA which enjoys market optimism, could influence the economic focus of the new government.

  • Upcoming political challenges: Local elections in two years present a potential hurdle, as governing parties may prioritize campaigning over collaborative governance. Furthermore, the looming ANC elective conference within three years could introduce internal political tensions.

  • External economic headwinds: The recent decline in South Africa's terms of trade, currently near post-COVID lows, suggests external pressures on the economy. Further delays in anticipated interest rate cuts from both the US Federal Reserve and the SARB would exacerbate this risk. Geopolitical uncertainties, such as the upcoming US elections, could also introduce unforeseen complications.


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Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an external contributor as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.

 

Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an employee of EasyEquities an authorised FSP (FSP no 22588) as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.

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