Local investors face dilemma as momentous SA & US elections prompt wait-and-see response
3 May, 2024

Jason Swartz, Portfolio Manager Old Mutual Investment Group



Uncertainty over elections has emerged as a dominant force influencing investment decision-making locally and abroad, as the electorate in South Africa, the United States (US), and many other countries prepare to elect new leaders in 2024.


South Africa’s national poll on 29 May 2024 is causing local investors to adopt a wait-and-see approach.


“Investors are sitting on the sidelines and seem content to wait for the election outcome before committing capital to invest in the local financial markets,” says Jason Swartz, Portfolio Manager at Old Mutual Investment Group (OMIG). He says the election result will shed light on post-election coalitions as well as the potential long-term policy implications of the same.


“The dilemma local investors face is whether to look offshore for expensive equities that are showing continued resilience or consider opportunities in the domestic market, where many shares offer a risk premium to compensate for both the economic reality and election uncertainty,” Swartz says.


The US is also preparing to hold its poll in November, and Swartz says the outcome of the country’s 60th presidential elections could be one of the most defining moments in US democracy. “It will influence policymaking around key economic issues such as foreign relations and global trade; environmental issues such as climate change and net-zero; and social issues like abortion and immigration, to name a few,” Swartz says.


Early polling in the US points to a fine balance between incumbent Democrat President Joe Biden and his Republican counterpart, Donald Trump – though much could still unfold in the coming six months. Biden is losing ground due to his age; his administration’s failure to tackle illegal immigration; dissatisfaction regarding military support of Ukraine; and a negative assessment of the US economy. Trump, on the other hand, is having to juggle his upcoming criminal cases with his campaign.


Asset managers are primarily concerned with what US post-election economic policy could look like.


“Biden’s economic policy has focused on spending to support infrastructure and jobs – Trump is likely to reintroduce his ‘America first’ focus by cutting taxes, deregulation, and higher tariffs to target China imports,” Swartz says.


“The former’s policy will continue to run the economy hot while the latter’s policy would favor US equities but negatively impact global supply chains.”


While it is largely expected that the ANC will lose its majority following the election next month, key unknowns how far support for the ruling party will fall below the critical 50% level and what the post-election coalition landscape will look like.


From a financial markets perspective, asset managers and investors are keen to know what policy shifts the SA elections could usher in, as this will give some indication of the likely impact on the risk and return dynamics for the market.


A wait-and-see approach is therefore understandable in the context of the country’s lacklustre economic growth outlook, alongside the range of well-documented infrastructure challenges in areas like electricity, logistics, and more recently, water supply.


Over the first quarter of 2024, SA equities have been languishing, with most JSE-listed shares ending lower over the period. Domestic bond yields have ticked higher over the three months. The quandary for local investors is whether to wait this out or look offshore where there are broader opportunities, but at an increased expense, according to Swartz.


Economists and market analysts are hopeful that the South African government’s economic cluster will emerge with minimum disruption post the elections.


“We would like to see institutions like the central bank; National Treasury, and SARS retain their independence following the elections, and that the country’s fiscal and monetary policy position remains orthodox,” Swartz says.


International investors, however, also remain concerned about certain election outcomes, particularly an ANC-EFF (Economic Freedom Fighters) tie-up due to the latter’s radical approach to land reform and the independence of the central bank, among others.


“The market reaction to an EFF coalition with the ANC could be disastrous from a risk premium perspective, and we would see that reflected in the rand and in capital outflows. Therefore, this is something that asset managers are actively hedging against,” Swartz says.


OMIG has undertaken a fair amount of quantitative analysis to understand the complexity and dynamics of how parties might perform in the election and what post-election political partnerships might look like.


“Most asset managers are thinking about their positioning in domestic SA-facing equity and whether to remain overweight SA equities or SA bonds – we need to know where we need to hedge these positions or under what scenarios we might wish to take some profit from a cyclical perspective,” Swartz says.


The asset manager prefers SA nominal bonds, though it admits to trimming some of its exposure in that asset class ahead of the local election “to reflect some cautiousness around what the post-election policy implications could be”.


As for the domestic market equities, Swartz says a lot depends on whether one embraces the risk premium on offer and to what extent you decide to hedge your positions.


“Investors that are not prepared to embrace or accept the risk premium in SA equities could consider adding exposure to global industrials or global defensives,” Swartz says.





@Jason Swartz
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