Investors cheering a possible Cyril Ramaphosa victory in South Africa’s ruling-party elections may be getting ahead of themselves.
The reformist agenda of Ramaphosa does have the potential to help accelerate economic recovery, avoid a credit-rating downgrade and strengthen the currency, according to money managers including Credit Agricole CIB and JPMorgan Chase & Co. Yet, markets aren’t factoring in the formidable challenges that could limit progress, they say.
The rand headed for its biggest two-day gain since March 2016 and the benchmark equity gauge rebounded from a three-week losing streak. That optimism could prove overdone if the traditionalist faction of the African National Congress challenges a Ramaphosa win or President Jacob Zuma’s supporters hinder the new leader’s program.
“The market is clearly pricing a Ramaphosa win at the moment and is getting ahead of itself,” says Guillaume Tresca, a Paris-based strategist at Credit Agricole. “First, Zuma could remain president until 2019, which means there is a risk of negative political noise. Second, there could be a balance of power to keep the unity of ANC, so it could be less positive than earlier thought.”
Other investors express similar views:
- Sonja Keller, strategist at JPMorgan, Johannesburg:
- “Should Ramaphosa be elected, financial markets probably would anticipate Moody’s holding off on a ratings downgrade in March next year. If the election results in a mixed slate with the top six new ANC leaders drawn from both the modernist and traditionalist camps, such expectations could be muted or indeed absent.”
- Nigel Rendell, senior analyst at Medley Global Advisors, London:
- “The market is assuming that he’s won, which is a brave because the race is really close. The market doesn’t always price things correctly, and in this case, it’s being too cavalier.”
- “Even if Ramaphosa wins, he’s not the answer to all of South Africa’s problems. The government needs to reverse corruption that has impacted the nation over the past 10 years.”
- Julian Rimmer, an emerging-markets trader at Investec Bank Plc, London:
- “A Ramaphosa victory on a reformist agenda would definitely be positive. The very fact of his paying lip service to the right things would give investors confidence.”
- But, “one has to be pragmatic and the best one can hope for is a positive trend in government and economic stewardship. The chances of South Africa looking like a first-class liberal market democracy 12 months from now, fully transparent with no whiff of corruption or wasteful spending is fanciful.”
- Paul McNamara, fund manager at GAM U.K. Ltd., London:
- “We’ll see the rand move fairly sharply weaker not least because it has strengthened quite a lot in the last few sessions on the view that Mr. Ramaphosa is going to win. I think the point is more that he is not Mrs Zuma rather than that he has some fantastic agenda.”
- Simon Quijano-Evans, strategist at Legal & General Investment Management, London:
- “Politicians are under pressure to change and they are getting a reaction not just form the local electorate, but from markets. It will be pressure from both those angles that will force change.”
— With assistance by Paul Wallace