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With Risk Comes Reward

03 May 2019 by jbchevrel

Next Wednesday (May 8) we will see both national and provincial elections in South Africa (SOAF). Looking at the polls, the ruling ANC seems set to stay in power, but the margin of the victory will matter for markets. At the last election (2014), the ANC got 62% votes. Recent polls have put the ANC between 51% and 61%. But the fact that the latest poll from IRR (serious agency) printed 51%, could be worrying a sign that the ANC victory will be shorter than most people had expected. Two mitigants, here. It is worth noting that the IRR poll was not done face to face, which could increase the share of false responses marginally. It also assumes a 100% mobile phone penetration, which could result in undercounting of vote intentions in the rural areas, where coverage can be bad. And the rural areas happen to be more supportive for the ANC. While this 51% print is not incompatible with a victory in the high-50s (market’s base case, it seems), a too short victory (low-50s) would probably destabilize Ramaphosa within his own party and could make his pro-business & anti-corruption agenda more vulnerable to the populists’ demands. Why? Because the one party that has been rising against ANC is the 2nd most representative, the DA (Democratic Alliance – historically seen as a party for white voters). Thus, a too tight ANC victory would make them constrained to ally with the EFF (Economic Freedom Fighters – left-wing populists, not exactly fiscal hawks) against the DA. Geographically, the interesting province to watch will be the Gauteng (~1/4 of SOAF population, urban/business core with Jo’Burg and Pretoria). The ANC has been declining in the polls in the Gauteng and this might reduce their chances to build a >50% majority in the provincial parliament, which can then increase the probability of a ANC–EFF alliance. Potential causes for public discontent include the sluggish economy, inflation, high unemployment, the power outages (Eskom’s financial & operational troubles would deserve one full Grapple comment). The sovereign 5y SOAF CDS has outperformed its EM peers over the past weeks, it closed @ 188bp today, almost in line with the broader CDX EM 5y s31 (189bp), in which its weight is of 8%. While they were respectively 197bp and 166bp on last roll day close. This RV strength was also in FX, ZAR just -0.7% vs $ over the period while TRY -9.1% ARS -7.9% COP -5.2% BRL -4.1%. This picture makes a ‘tight’ ANC victory look like a low-probability-high-outcome event. With risk comes reward.