Markets will look to ANC for growth-friendly reforms

Cape Town - The markets will keep a close eye on the government's take on growth-friendly reforms following the outcome of the local election, according to Old Mutual Investment Group chief economist Rian le Roux.

South Africans went to the polls on Wednesday in municipal elections that may bring a change in the country's political landscape. The final results are expected to be announced on Friday.

"In the wake of the elections, markets will closely monitor whether the government accelerates growth-friendly reforms or not,” said Le Roux.

Graham Tucker, Old Mutual Balanced Fund Manager at Old Mutual Investment Group, believes policies or decisions not aimed at addressing growth or fiscal discipline won’t be viewed as favourable by the markets.

“We have previously seen an extreme example of possible market reaction with the termination of then Finance Minister [Nhlanhla] Nene in December 2015 - the rand fell sharply and South Africa’s cost of borrowing increased significantly,” said Tucker.

Le Roux said the reaction to the threat of the ANC’s position of power will be crucial.

“There was initially concern that, should the ANC lose some ground to the EFF, it would adopt a more populist approach to mitigate against further loss of votes in the future,” he said.

“However, with the EFF emerging as not eating into ANC support as much as expected, and rather losing support to the more business-friendly DA, the risk of the ruling party taking this approach appears to be waning, and with it, the threat that this poses to SA’s credit rating.”

Tucker said based on the election outcome, the rand, local bond market and portions of the equity market sensitive to such variables – such as banks – may experience volatility.

"However, on the positive side, the local equity market has many companies with a strong global footprint. Therefore any weakness that may be observed in the rand should benefit those counters.”

On the uncertain global macro-economic environment, Tucker said global growth remains uncertain and global inflation stubbornly continues to persist at current low levels, which means central banks are unlikely to hike interest rates in the foreseeable future.

He said this environment benefits emerging markets, as investors search for yield. "We have seen this in the recent strength in the rand and the local bond market."