During the last quarter under review the JSE All Share Index rose to over 80,000. This, coupled with a relatively strong rand, shows that local and global investors were mostly positive about South African stocks. However, centre stage has been dominated by the 29th May national elections and we will address the impact thereof in more detail below.
Unfortunately, as the political chaos of a national vote unfolded, it bought with it the realisation that South Africa, for the first time since 1994, is now in volition territory. The magnitude of the ANC’s loss in failing to secure a majority for the first time in 30 years, compounded by the significant success of Jacob Zuma and his uMkhonto weSizwe (MK) party, particularly in KZN where they won nearly half the vote, has certainly caused upset in the political landscape.
Ongoing coalition talks between the leaders of the main parties remain uncertain with no obvious outcome, leaving investors bracing for further market upheaval. Both the MK and the EFF parties are in favour of increased state spending, nationalising the mines and the central bank, and expropriating land without compensation. An alliance with either of these parties would most likely mean President Cyril Ramaphosa’s departure. There is strong opinion that investors would prefer an ANC/DA coalition, as this would be a more productive and responsible alliance and would maintain business stability. Bear in mind also that any coalition, negotiations could be complicated by potential internal conflicts within the ANC. We will have to bide our time as the ink fades on our thumbs until the National Assembly convenes in two weeks to elect a president.
The election, and build up to the election, will obviously have a significant impact on the economy and the market over both the short and medium term. As a side-effect of the recent political chaos, and as investor confidence tanked, the stock market dropped and the rand weakened significantly. Financial markets are expected to remain unsettled over the next few weeks while coalition discussions are in progress. The rand may experience volatility until the political situation becomes clearer and we see what our new parliament looks like. It is probably prudent for investors to adopt a more patient approach in the wake of this uncertainty until such time as there is greater transparency.
It must be stressed that South Africa is not the only country with political problems which may affect stock exchanges. In the US, Donald Trump’s presidential campaign was set back by his recent conviction on all 34 counts of falsifying business records to cover up a hush-money payment to adult film star Stormy Daniels, which has further divided the United States. He is scheduled to be sentenced on 11 July, which could prove to be a “breaking point” for his supporters ahead of United States presidential elections in November. Further to this, Rishi Sunak announced that the United Kingdom will be holding their national elections on 4 July 2024 and it remains to be seen how Sunak’s Conservative Party fares against the opposition Labour Party.
Again, all eyes have been focused on the artificial intelligence (AI) focused stocks, which have seen significant interest from global investors. This is a challenging one given the many benefits, but also complex risks, and there is no certainty as to how technology and business cycles will evolve in the months and years to come.
Along with geopolitical tensions, we continue to see a number of areas of conflict both in the Middle East and in Ukraine, which will continue to cause supply chain disruptions and have an impact on inflation. As yet, we have not seen central banks using interest rates, which historically has been beneficial for exchanges globally.
The geopolitical global pressures are creating an environment in which Russia, China and North Korea are having to work more closely together, which raises tensions with the leaders of the Western world. One would sincerely hope that we see a de-escalation of the tensions and a return to global stability, which is in the best interests of business and the civilians affected by these conflicts.
Below is an indication of how the Global Bourses have fared over the last few quarters:
The below graph tracks the performance of the Rand against the US Dollar over a seven-year period:
The below graph tracks the performance of the JSE All Share Index over a seven-year period:
As a result of the elevated level of corruption, particularly amongst the political elite, South Africa continues to be placed on the greylist, meaning that from an international compliance point of view we have seen a significant increase in demands from our global business partners to ensure Enhanced Due Diligence (EDD), which has added to the complexities of both creating new accounts and adding information to old investment accounts on behalf of clients. South Africa urgently needs to focus on complying with the global regulator’s requirements in order to be removed from this status. Along with removing the greylisting status, South Africa also needs to substantially reduce crime and corruption which have been instrumental in the political risk premium built into South African financial assets.
On the regulatory front, we are expecting a new act to be tabled sometime this year called the Conduct of Financial Institutions (COFI) Act. The aim of the COFI Act is to incorporate (and consolidate) all of the principles of conduct held in the multiple pieces of legislation which currently govern the financial services sector, but it remains to be seen what the already challenging compliance landscape will look like after the implementation of this act.
Unfortunately, as with most of our state departments, the Master of the High Court is also battling with turnaround times, which in turn has a ripple-effect on matters relating to trusts and deceased estates, amongst others.
On a more positive note, with the elections out the way and with no single party dominating the new political landscape, we can collectively embrace a more democratic, inclusive and accountable focus on improved service delivery and the unification of South Africans that has not been possible under the ANC governance. There is also hope that the private sector will be more involved and participate with coalitions and, once again, South Africa has the opportunity to nurture the maturity shown between the respective business structures, government and political parties.
Over the past quarter, we have welcomed three new members to our Team. Sharon Fernandes, Ivy Mathenjwa and Tyla Hooper. With strong backgrounds in the finance sector, they bring a wealth of experience and fresh ideas to our team.