Investment Implications For A Government of National Unity

Investment Implications For A Government of National Unity | Futuregrowth Asset Management

The South African Government of National Unity (GNU) has been formed. Will it fall apart, or will it hold firm? What are the implications for financial markets, particularly bond markets?  

Old Mutual Investment Group’s Futuregrowth Asset Management is responsible for managing money markets and cash mandates within the Old Mutual Group.

Due to their close working relationship with the government and treasury, they have added insights to most regular market commentators.   

Several years back, in 2016, they made news headlines when declining specific large investment mandates for state-owned enterprises, citing a lack of visibility at the time. They were later (sadly) highly controversial back then, proven to be somewhat correct, as we all saw afterwards.     

They share their latest views on what the investment implications for a government of National Unity are;

History is dotted with examples of GNUs that preceded times of transition on the African continent. Some were successful, and others less so. For example, Zimbabwe’s GNU, formed in 2009, ended in political violence.

Power struggles, corruption, and human rights violations marred it. In contrast, the GNU formed in Kenya in 2008 put an end to the post-election violence at the time, led to the implementation of constitutional reforms, and fostered national reconciliation.

South Africa formed its famed GNU in 1994 as it transitioned from an apartheid regime to a democratically elected government. The GNU was led by President Nelson Mandela and included representatives of the former ruling National Party and the Zulu-based Inkatha Freedom Part.

This time, we find ourselves with another GNU under different circumstances. With the ruling ANC failing to achieve a majority vote in this year’s national elections, it has resorted to forming a GNU. This includes the DA, IFP and several smaller parties but excludes significant parties (in terms of votes garnered) such as the MKP and EFF.

The market has received the current configuration of the GNU well because it points to policy continuity and may result in increased accountability within the government, with diverse political parties forming part of the government framework.

On the other hand, the ideological differences between the ANC and the DA (in particular) may cause ructions in both parties. Within the ANC, factional fault lines risk being exposed, particularly when ideological compromises are made to accommodate ‘opposition’ parties. The DA risks alienating its voter base if it is considered cosying up to the ANC in the name of power and positions. Both parties are expected to walk a tightrope now that they’ve formed a government.

Investment implications

The investment implications of a GNU are almost always context-dependent. The GNU's short-term intention is to bring stability and political unity. A cooperative government is generally viewed with optimism and engenders investor and business confidence. Conversely, the complexities inherent in a GNU, especially poorly managed ones, risk creating investor uncertainty.

South Africa’s GNU between 1994 and 1999 was marked by optimism and increased foreign investment. The stability provided by the GNU during the transitional phase helped reassure investors. However, over time, we have observed, both locally and elsewhere, how underlying tensions, political infighting, and a lack of policy coherence can eventually dent investor confidence.

In Our Favour

In South Africa, the expectation is that a successful GNU could continue growth-enhancing economic policy. Economic reform initiatives such as Project Vulindlela, which has begun showing signs of progress, are expected to continue.

The lack of individualised political power may result in a more diverse and collective view on policy development and decision-making on key issues.

Additionally, a more equal distribution of power opens the possibility of increased accountability, as no individual political party can enforce policy outcomes without broader consultation, and the others can reprimand each political party if it steps out of line.

These positives should result in lower risk premiums and increased capital inflow.

Impediments

Unfortunately, politics is never that simple. The adage ‘too many cooks spoil the broth’ rings true as a GNU requires extensive consultation and broad consensus on key issues, resulting in delayed decision-making. A dispute resolution or deadlock-breaking mechanism would need to be implemented where there are disagreements.

Markets are sensitive to political uncertainty, especially in an economy such as ours, where politics plays such a pivotal role in the overall outlook. Ideological differences on key issues are bound to create contention and conflict, which will put pressure on the dispute resolution mechanism. Signs of a political and policy division in the GNU could make for a bumpy ride over the coming five years.

Investors will be affected by this uncertainty unless the GNU can demonstrate its ability to work in a unified manner, especially in the near term. Recent rumblings as political parties jockeyed for cabinet positions may prove to be the “canary in the coal mine”.

Bond Market Outlook

The local bond market has rallied aggressively amidst a more certain political outcome. With Cyril Ramaphosa and Enoch Godongwana being reappointed as President and Minister of Finance, respectively, expectations of policy continuity from a fiscal and monetary perspective have spurred a strong 100 basis point move lower in bond yields across the yield curve.

With bond yields closer to fair value and political uncertainty largely out of the price, attention will shift back to the fundamental outlook, but a beady eye will remain on political developments.

Infrastructure Outlook

Infrastructure reform, particularly in the energy and transport sectors, will be vital to improving South Africa’s growth outlook.

If South Africa can achieve consistent real GDP growth of 3% and above, stabilising the elevated +70% gross debt to GDP ratio becomes a very likely scenario.

Suppose you add a possible improvement in the rating outlook and South Africa’s removal from the FATF grey list. In that case, we have a recipe for significantly improved investor and business confidence.

In Closing

The ruling party willingly accepted the election outcome despite losing an outright majority after holding it for 30 years, which is a testament to how far we’ve come as a democracy.

Despite ideological differences, the speed at which the GNU was formed also indicates a level of political maturity among South Africa’s major parties.

Ultimately, the next five years will tell a story of political disorder and division or unity and strength.

Source: Investment Implications For A Government of National Unity | Futuregrowth Asset Management

Who Doesn’t Need to File a Tax Return

The SARS efiling tax season opened on Monday, and taxpayers can now start submitting their February 2024 tax returns.  

However, even if you’re a taxpaying salary earner, you do not have to file a return in 2024 in the following instances:

·If your salary does not exceed R500 000 annually from a single source (R41 666per month). This does not include a retirement lump sum.

·Income generated from an interest in South Africa not exceeding R23 800 (less than 65 years old) and R34 500 (older than 65 years of age (this excludes any tax-free investment).

·Tax-exempt dividends where the individual was a non-resident throughout the year.

·Amounts received or accrued from tax-free investments throughout the year.

·A single lump sum payout received from a pension fund, provident fund or retirement annuity fund where tax has already been deducted in terms of a tax directive.

Exceptions to the Rule

SARS auto-assessments are making it quicker and easier than ever to put tax season in the rearview mirror.

However, the above may not apply in the following circumstances:

·If you’ve paid any allowances for business travel, accommodation or subsistence.

·If you receive any taxable benefits through your employment.

·If you accrued any salary/income outside of South Africa.

Here’s how to start talking finances with your kids

Boost children’s financial literacy with these money conversations.

How the F(inance) do you talk ‘money’ with kids?

A 2020 T Rowe Price study found that 41% of parents feel anxious talking to their kids about money, while a 2024 Her Money Mindset survey suggests that 20% of parents don’t broach the topic at all.

Yet honest money conversations are critical for instilling foundational financial literacy. More than that, they can bring families closer together and normalise ‘money talk’ early on.

The bottom line? It’s time to talk about Project F – finances.

Speaking about finances makes money less intimidating and familiarises kids with foundational concepts from the get-go. This is what Sanlam’s Project F campaign aims to achieve – getting people talking about money more.

Three critical money conversations to have with your children:

1.The value of money and how it’s earned

2.The difference between spending, saving and giving

3.The difference between needs and wants

Click here to learn more.

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