On Wednesday, May 29, South Africans go to the polls in what many believe will be a watershed moment in our 30-year-old democracy. The ANC, the party that has governed the country since 1994, is predicted to lose its majority. If that happens, what will be the impact on financial markets and how will your investments be affected? Should you take precautionary measures in the couple of working days left before election day to protect your capital?
Here’s my take on possible political outcomes and the financial consequences:
Scenario 1: The ruling party retains its majority. This will result in more of the same – a benign outcome for investors over the short term, but providing bleak economic prospects over the longer term, given the ANC’s track record.
Scenario 2: The ruling party loses its majority by a small margin and forms a coalition with one of the smaller parties. The outcome will be essentially the same as above.
Scenario 3: The ruling party loses its majority by a substantial margin and forms a coalition with one or both of the left-wing parties, the MKP and the EFF. I can’t think of any investor or businessperson who would view this outcome favourably. Markets will tank, as will the rand.
Scenario 4: The ruling party loses its majority by a substantial margin and forms a coalition with centrist parties, including the DA. This will be the most favourable political outcome for investors and business people, but here we must consider the reaction of South Africa’s impoverished majority, who, I believe, will not take kindly to the government veering to the right. In this scenario, the probability of rioting in KwaZulu-Natal spreading to other parts of the country, similar to the looting and chaos we witnessed in July 2022, is high. Markets may temporarily tank, as may the rand.
Of the four scenarios, two (1 and 2) are not likely to affect investors adversely in the short term and two (3 and 4) are, while three (1, 2 and 3) are likely to affect investors adversely in the long term.
‘Knee-jerk’ warnings
Financial experts are warning investors against “knee-jerk” pre-emptive actions. In an article titled, “Does it really matter?”, Debra Slabber, portfolio specialist director at Morningstar South Africa, notes: “The election could be a significant one. What will happen this time around? Will it be a regime shift, are we facing a coalition government, or will it just be more of the same? Who knows? It’s incredibly difficult to predict how these political events will pan out, and even harder to predict how the market will react to these events.”
She points out that South African investors have had to endure many uncertainties over several years, including a weak currency, lacklustre economic growth, an unstable energy supply, deteriorating infrastructure and elevated interest rates.
“Uncertainty, volatility, and political instability are nothing new to South Africa.”
Slabber says it’s wise to acknowledge that elections will most likely increase short-term volatility, but this should not affect your long-term investment strategy or financial plan.
Kingsley Williams, chief investment officer of Satrix, agrees that the elections bring the potential for heightened volatility, and that this isn’t necessarily an issue if your investment horizon is for the long term.
“Research suggests that short-term tactical calls tend to detract more value than they add, as they require consistently timing the entry and exit points correctly,” he says.
Williams says it’s impossible to forecast how the elections may move the markets.
“Forecasting these binary or probability outcome events is not how we approach investing. Even if we predicted the election result correctly, how the market may subsequently respond is still unclear,” he says.
Vulnerable portfolios
Ignoring a short-term shake-up is the right approach for investors who are confident in the robustness of their investment portfolios and who have time on their side (at least 10 years). But my concern is for investors whose portfolios do not have the requisite blend of assets to cushion volatility, and investors who need to access their capital within the next few years.
On top of this, we cannot ignore the long-term economic implications of scenarios 1, 2 and 3, which will affect all investors.
This is not just another election. It will likely determine this country’s trajectory – forwards towards job creation, foreign investment and economic growth, or continuing backwards (slowly in scenarios 1 and 2, quickly in scenario 3) and ending up a failed state such as Venezuela or Zimbabwe.
Talk to your financial adviser if you share my worries. And ensure that your investments are well diversified across asset classes and economies.
Slabber stresses the importance of diversification.
“With all the uncertainties in the world of investing, diversification remains one of the most important and underrated strategies to deal with a wide range of outcomes,” she says.
Williams agrees.
“Every asset class has its own risks, which is why a multi-asset class mix of both local and offshore assets is often the best solution. This can diversify foreseen and unforeseen risks and provides a smoother growth path to achieving above-inflation returns over the medium to long term,” he says, adding: “It’s always important to match a portfolio to a client’s risk tolerance and investment horizon.”
* Hesse is the former editor of Personal Finance.
** The views expressed do not necessarily reflect the views of Personal Finance or Independent Newspapers.
PERSONAL FINANCE