Newsletter Archive

GNU 2.0 the best possible outcome for investors

South Africa’s second Government of National Unity in three decades heralds good things to come for the country and investors. Financially speaking, it is the best outcome we can hope for in a challenging political environment.

Dominated by the ANC and the Democratic Alliance, the GNU 2.0 has brought 11 of the 18 parties together in what Oxford Economics senior political analyst Louw Nel calls a “coalition of convenience.” The left-wing parties, the Economic Freedom Fighters (EFF) and Jacob Zuma-led uMkhonto weSizwe (MK), which garnered 25% of the vote between them, thus become the official opposition coalition.

President Cyril Ramaphosa’s announcement of his Cabinet was also greeted favourably by financial markets. The decision to maintain Enoch Godongwana as Finance Minister, the most crucial economic portfolio, resulted in the rand rallying below R18 to the dollar (but then retreating in line with a stronger dollar).

Post-election financial market milestones

The bull market rally in the rand, bond market, and equities confirms that investors approve of the post-election outcomes and shape of the new government. The rand’s relative strength is a useful gauge of global investor optimism and is indicative of the foreign investment flows coming into the local bond and stock market.

The benchmark 2035 government bond became the best-performing emerging market local currency bond in June, gaining almost 10% – quite something when you consider that bonds in global emerging markets experienced a small decline for the same period.

The JSE All Share Index also got in on the action, rallying to a new record high, with the banking sector running particularly hard on the positive political outcomes witnessed during the month.

Coalition challenges to avoid

South Africa’s political and economic outlook is not without its challenges. Global and local (especially municipal) experiences highlight that it’s not easy for a coalition government to deliver on its promises because disunity can result in chaotic leadership and ineffective decision-making.

Critical for the success of the GNU 2.0

University of Johannesburg policy analyst Professor Daniel Meyer considers best-practice coalition principles to be:

• Reaching a shared vision of mutually agreed-upon priorities.
   
• Delineating roles and responsibilities.
   
• Implementing mechanisms that facilitate conflict resolution and consensus building
  .
• Ensuring there is transparency and accountability in decision-making and financial matters to build public trust and confidence.

The bottom line

Establishing an ANC and DA-dominated GNU 2.0 and reaching agreement on Cabinet Ministers in the key portfolios is the best possible investment outcome as it signals a commitment to ongoing structural economic reforms and economic growth. However, investors will be looking for evidence of delivery, and they will vote with their feet if the government doesn’t live up to its promises.

If you have any questions about how all of this affects your investment portfolio, please give us a ring.