KEY TAKEOUTS

• The Government of National Unity and its cabinet offers a lot for investors to be excited about, including both ANC and DA key cabinet appointments that can influence growth.
• As investors, we are closely watching to see the momentum in news flow regarding the energy capacity rollout in the coming years, as well as progress on Transnet – specifically around third-party access and investment.
• A further key signpost relates to indications that there is enhancement in the professionalisation of the state, and the building of competencies across departments.
• Our portfolio positioning reflects some optimism regarding our political landscape and what that means for SA assets, but we continue to look for strengthening evidence of the sustainability of growth enhancing reforms that will unlock their value over the long-term.

It is widely accepted that investor confidence is the price for political instability. Countries that experience seismic political transitions are particularly exposed to large risk premiums, where investors of domestic asset classes are happy to accept higher discounts to fair value in exchange for the high uncertainty in the political economy, and what this means for the country’s growth trajectory.

This has never been truer than in the months leading up to South Africa’s general election in May. South African assets whipsawed as investors shifted quickly from pricing in a worst-case scenario in January based on polling data that suggested a populist shift, to May when polling data implied a strong possibility of a coalition of the ANC and less influential minority opposition parties, ensuring some policy continuity and a continuation of the status quo.

Market digestion

Yet with all the volatility experienced leading up to the election, what investors did not expect was the remarkable result where the MK Party would take significant votes from the ANC and land on 14.5% of the national vote. This further splintering of the ANC (post the rise of the EFF in 2014’s national election), left the political landscape at an impasse with no obvious coalition scenario. Once again, this result left markets rattled in early June, as coalition talks began with increasing permutations of outcomes.

Eleven days after he was inaugurated as president for a second term, Cyril Ramaphosa announced his coalition cabinet on 30 June 2024.

Eleven, long, days.

Both Thabo Mbeki and Jacob Zuma announced their cabinets the day after their inaugurations, while Ramaphosa took four days in 2019. This time around, the lengthier delay was a direct result of the ANC falling to 40% and the president no longer having the luxury of appointing party members to cabinet positions. Instead, the unveiling of the cabinet, which, in total, included 11 parties in a Government of National Unity (GNU), was largely unprecedented in our democratic history.

But while the news of a GNU was welcomed with positive market sentiment, it was clear that coalition negotiations were fragile. News of significant haggling, poor faith talks and threats of walking away from the table kept markets on edge out of concern that a deal may not be reached. Ultimately, Ramaphosa made some tough decisions to try and placate parties with fair and proportional representation in ministries that they felt were important to their party, but he failed to contain the number of appointments in an already bloated cabinet.

Much for markets to be optimistic about

However, the cabinet offers a lot that investors can be excited about. Firstly, a factor which has very little to do with the GNU, is the retention of Enoch Godongwana as Minister of Finance. This will ensure continuity in the crucial policy of fiscal consolidation, where commitment to fiscal discipline is now going to be extended.

The second reason is the reappointment of Khumbudzo Ntshavheni as the Minister of the Presidency, where Operation Vulindlela is held in partnership with the National Treasury. This implementation project is critical in terms of prioritising the policy reform agenda. Both appointments, as they relate to the cardinal objectives of fiscal performance and structural reform, have been positively viewed by investors, with government nominal bonds and the JSE Banks Index strengthening since talks of GNU emanated and the subsequent announcement of cabinet. The appointments also reflect stability in key policy areas, a necessary element of investor confidence. And two other ANC cabinet positions positively received when it comes to economic impact, Barbara Creecy in Transport and Kgosientho Ramakgopa in Electricity and Energy.

Regarding opposition party appointments, the DA received six of the 32 cabinet posts, while smaller opposition parties also hold six positions. Noteworthy DA posts included Public Works and Infrastructure as well as Home Affairs, both of which are moderate growth levers. South Africa's fixed investment as a percentage of gross domestic product (GDP) has historically been too low while improving our visa regime can attract more skilled foreign workers to obtain work permits.

Investors might have been disappointed by the missed opportunity for some renewal in the post of Mineral Resources. Gwede Mantashe remains the minister here, although the electricity and energy ministry is being absorbed elsewhere. There is a lot of work still to be done to rework the integrated resource plan as well as improve the mining licence framework.

Too soon to call

In our view, there are lots of upside risks ahead for South African asset classes, however, investors are likely going to wait and see how the GNU governs collectively, and whether it sustains. At Old Mutual Investment Group, we are closely watching to see the momentum in news flow regarding the energy capacity rollout in the coming years, as well as progress on Transnet – specifically around third-party access and investment.

A further key signpost relates to evidence that the GNU is enhancing governance and accountability – in other words, indications that there is enhancement in the professionalisation of the state, and building competencies across departments, as opposed to historical inter-governmental competition. This shift should allow more stability of the above-mentioned reforms and sustain a better growth platform for the country.

There is little argument that South African asset classes, as well as SA Inc. equities are still undervalued. Investors, particularly foreign investors, are beginning to do their homework and looking for an entry point into South Africa. Notwithstanding this, these investors are also sitting on their hands waiting for global events to play out, specifically when it comes to the timing of the Fed’s interest rate cut and the outcome of the US election as it pertains to the impact on emerging markets assets.

For now, our portfolio positioning reflects some optimism regarding our political landscape and what that means for SA assets, but we continue to look for strengthening evidence of the sustainability of growth enhancing reforms, which are ultimately the catalysts for SA assets to unlock their value over the long-term.