Elections in South Africa, what impact on the markets?

Countdown to elections on May 29th in South Africa. A vote that could change him political balance given that according to some polls the party in power, the African National Congress, the ANC it is decreasing.

Elections in South Africa “in the dark”

“Our baseline scenario with respect to the outcome of the May 29 elections is for the ANC to achieve a percentage above the 45% e which, most likely, will enter into a coalition government with smaller parties,” he writes Gary SedgewickEmerging Market Debt Portfolio Manager, RBC BlueBay underlining that “the ANC campaign machine has kicked into high gear in recent weeks, recording a surge in support, which will likely push the ANC's vote share to 45-49%, with the possibility of obtaining one small majority.”

“That said, there are still many risks posed by new parties such as the MK Party, led by the former president Jacob Zuma, which will likely draw voters away from the ANC. While the opposition parties to the ANC, such as the Democratic Alliance (DA) and the MK Partyenjoy strong support, according to the former surveys, the self-inflicted wounds and infighting of recent weeks have slowed the momentum of these campaigns to the advantage of the ANC, the whose campaign has regained strength”.

The scenarios

In case the ANC vote share is iless than 45% and the party participates in discussions for the formation of a coalition with the major opposition parties, “we expect that the 14-day period for the creation of the coalition it will be volatile for the markets. Indeed, investors will weigh the odds of the ANC allying itself with these different parties, which offer more extreme political prospects in both positive and negative directions for the country and financial markets,”

Our baseline scenario, with a minority ANC and a coalition with smaller parties,” provides the status quo regarding reforms and policy direction in South Africa. Given the markets' fears of a coalition with the MK Party or the EFF and the downside risk posed by this situation, we believe that an outcome aligned with our baseline scenario will lead to upside for South African risk assets”.

Positive scenario for fixed income

“In terms of positioning, we are overweight local government bonds and South African sovereign credit, while we are underweight currency. Given the recent positive movements in South African assets, we believe that the risk premiums discounted in the South African Rand exchange rate are reduced, while the positive asymmetry manifests itself in the South African local bonds and sovereign credit”, concludes the expert.