South Africa: Stronger Rand and Gains for Investors!

President Cyril Ramaphosa declared the start of a "new era" as he began his second term. Despite the African National Congress (ANC) failing to secure a majority in the recent election, they formed a coalition with the Democratic Alliance (DA) and other parties. Ramaphosa warned that without addressing deep inequalities, the country could face instability.

The ANC, in power since apartheid ended in 1994, lost its majority for the first time, securing 40% of the vote and losing 70 seats. Lawmakers re-elected Ramaphosa after the ANC's power-sharing deal with the DA and three smaller parties. Despite their ideological differences, the ANC and DA agreed to focus on infrastructure, basic services, and job creation. Ramaphosa emphasized the coalition's commitment to reducing inequalities and boosting the economy.

During this, the rand gained momentum against major currencies like the dollar, pound, and euro.

Source: Google 

According to Bloomberg, the government's pledge to expedite reforms, including reducing state debt and addressing power shortages and logistics issues, has boosted sentiment. Excluding parties favouring land expropriation and nationalising mines and banks also improved investor confidence.

A strong currency benefits the local economy by keeping import costs low, which helps control inflation. Low inflation allows interest rates to stay low, benefiting consumers, especially the indebted, by preserving their saving and spending power.

“This is the best-case scenario for South African politics — the DA's active participation in a GNU — and South African stocks should rally further,'' JPMorgan Securities plc David Aserkoff and Inga Galeni wrote.

S&P Global Ratings said that "the new government aims to prioritise structural reforms to address basic infrastructure and service delivery shortfalls and weak investments, while gradually narrowing fiscal deficits… the election outcome is broadly favourable for the economic and fiscal outlook, compared with the alternatives.''

The JSE index trimmed strong initial gains to close 1.2% higher at a record 80,714 on Wednesday, marking its third consecutive session of advances. Resource-linked sectors, industrials, and financials led the gains. Meanwhile, South Africa's headline inflation hit a four-month low of 5.2% in May, aligning with market estimates but still above the central bank's 4.5% target, and retail sales growth slowed in April.

Here’s an overview of how the market and the top 40 companies performed in the past week amid the GNU negotiations. In the past week, the JSE all-share index (SAALL) and the JSE top 40 (SA40) saw greener pastures.

EasyAssetManagement predicts a potential resurgence in the South African stock market, similar to the "Ramaphosa Rally" of 2017, saying:

• Coalition government: The DA's proportional cabinet acceptance boosts coalition prospects.
• Market optimism: Positive investor response is expected, akin to the "Ramaphosa Rally."
• Anticipated trends: Domestic stocks may outperform, and high-beta stocks may yield higher returns.

The Satrix 40, FNB Top 40, 1nvest Top 40, and Sygnia Top 40 are among the exchange-traded funds (ETFs) that offer investors exposure to the JSE top 40 companies and also pay dividends. The Satrix, FNB and 1nvest Top 40 ETF pay quarterly (with an annual dividend yield of around 2%), while the Sygnia Top 40 ETF pays twice a year (around 3% annual dividend yield). For some context, here's how the different ETFs performed during the JSE Top 40 rally 

Source: Google 

Sure, the rand has its upside when it’s strong, although there are also a few points to consider during such a period:

• A strong rand reduces local manufacturing competitiveness by making exports expensive and imports cheaper, impacting GDP and employment.
• Slow growth in key trading partners, further weakens export performance, leaving local manufacturing vulnerable. 
• Manufacturing and mining suffer from a strong rand, but relying on a weak currency is not advisable for competitiveness.

In addition, a strengthened local currency benefits investors exchanging it for a foreign currency to buy offshore shares by increasing their purchasing power as they can obtain more foreign currency, allowing them to buy more shares or invest more capital in the foreign market, making foreign investments cheaper.

JD Breytenbach, Purple Group Senior Trader, also highlighted that yields across all the major SA government bonds decreased, with the price rallying on strong investor sentiment. The SA R2035 bond yield decreased over 8% from its high in early June. This inverse relationship between yields and prices reflects investors' willingness to accept lower returns in yield for higher marginal safety, which also bodes well for SA in the long run.

Conclusion

Unity governments can also be seen as unsustainable due to the values, beliefs, and attitudes of political elites, which significantly influence policy, institutional culture, and legitimacy. A disconnect between elite values and public institutions can erode societal trust and the legitimacy of democratic institutions, leading to governance instability.

During a period of a strong rand, investors may want to diversify their portfolios across different sectors and regions to mitigate risk, focusing particularly on businesses that benefit from lower import costs.

Monitoring economic indicators and conditions in major trading partners and global markets is crucial to anticipate changes that might impact local investments and returns.