May 2024 Update

Making The News

1. Global Markets propelled by rate cut expectations

In May, global markets defied the adage “sell in May and go away,” with the MSCI World index posting a strong return of +4.5%. This was fuelled by optimism off the back of decreasing US inflation, with the latest figure showing a YoY rate of +3.4% compared to 3.5% in March. Additionally, this has raised expectations of a possible rate cut in September, particularly as retail sales remained unexpectedly flat in April.

The Nasdaq reached an all-time high before retreating near the end of the month after Nvidia and other mega-cap stocks saw declines. Regardless, Nvidia saw a significant gain of +27% month-over-month which was driven by strong earnings forecasts following the recent Q1 2024 earnings results. YTD, the Dow, S&P 500, and Nasdaq have delivered returns of +2.6%, +10.6%, and +11.5%, respectively. Against this backdrop, developed markets (MSCI World +4.5% MoM) have returned to trend and outperformed their emerging market counterparts (MSCI EM +0.6% MoM).

2. Stimulus fails to sustain the Chinese momentum

After China achieved an annualized GDP growth rate of +5.3% in the first quarter of 2024, the Chinese market has continued to trudge ahead delivering +2.4% (MSCI China, MoM) in May and outperforming its emerging market peers. However, the Chinese government’s efforts to support the property sector with new stimulus measures has not led to a sustainable recovery. The “property crisis” has edged the country’s official Manufacturing PMI into contractionary levels in May (49.5) and has negatively weighed on consumer sentiment.

To top it off, the Biden administration has tacked new tariffs on $18 bn worth of Chinese goods, which includes quadruple tariffs on Chinese EV’s (to 100% from 25%), as well as Chinese medical supplies and solar supplies as part of the “Section 301 tariffs on Imports from China”. Currently the Section 301 covers $300 bn worth of Chinese made products.

3. National and Provincial elections give pause to the local bourse

Over the latest interest cycle, the South African inflation has experienced a more gradual acceleration and peaked at lower levels relative to Emerging Market peers. In line with the South African Reserve Bank’s (SARB) expectations, inflation has remained higher for an extended period (+5.2% YoY in April). The SARB now predicts inflation to stabilize at the target rate of 4.5% in 2Q25, (two quarters earlier than the previous March forecast). Despite the recent low levels of load shedding, economic activity indicators for 1Q24 have fallen below expectations. Consequently, the SARB has projected lower growth for the first quarter of 2024, while maintaining a +1.2% forecast for the year. Following strong momentum in the local stock market, the National and Provincial election results have caused a pause as investors consider the potential implications of the ANC losing its majority. The most concerning outcome being the possibility of a coalition government with far-left populist parties such as the EFF and M.K. impacting the market.

Market Commentary

Impact on our Portfolios

Looking Forward

The falling voter turnout and voter registration has highlighted the populations disengagement from the voting system and political candidates

The watershed election held on the 29 May 2024 was the first time in democratic history that the ANC lost its government majority. The rise of the M.K. party in KwaZulu-Natal, as well as the support for the EFF in Gauteng and Mpumalanga weakened the ANC’s grip on power, and has led to the necessity of forming a diverse national coalition to govern South Africa.

The graph below shows that the number of registered voters has remained relatively flat since 1994, while the South African population has grown significantly. Additionally, the falling Voter Turnout since 1994 has highlighted the populations disengagement from the democratic system.

Interestingly, many analysts believed that the ANC would actually benefit from the low voter turnout and receive 45.5% of the votes. This would have provided a less volatile outcome as the ANC could easily reach support of 50% nationally by employing a coalition with a smaller party. Following the election results analysts had to readjust to the prospect of the need for a larger coalition than anticipated, which weighed in on the financial markets.

• The low support received by the ANC in the latest election was not due to the emergence of the MK party, as the voters had already moved to the EFF before the party launched

The graph below shows that the catalyst for the shift away from ANC was not due to the launch of the MK party but rather due to voters disenfranchising from the ANC. The October IPSOS poll shows that the EFF had an estimated 19.6% portion of the votes before the launch of the MK party. Rather than voters shifting away from the ANC after the launch of the MK party, the voters actually shifted away from the EFF.  This highlights that the pool of voters had already been disenfranchised from the ANC. Critically this shift in support did not favour the DA party, which is concerning for an ANC/DA coalition as the coalition would require a broader inclusion of other parties to access the disenfranchised voters

Although most analysts believe that the DA & ANC coalition is the most likely option, it is still possible for the ANC to achieve a majority via an ANC & MK coalition or an ANC, MK & party with two seats coalition.

As you can see below, the ANC achieved 159 seats on a national level, while the DA, MK and EFF parties reached 87, 58 and 39 seats collectively. In terms of possible coalitions, the ANC has reiterated their support for President Ramaphosa and rejected any coalition that excludes him. Despite the uncertainty of the possible outcomes, the first sitting of the National Assembly must occur within 14 days of the National Election results being declared where a President, House Speaker and a Chairperson of the National Council of Provinces must be elected.

The graph below represents the possible coalitions that the ANC may employ to reach over 50% nationally. However, it is still possible that the ANC could have a coalition with multiple parties to reach a majority.

A coalition without the MK party could prove troubling for the ANC, as they need to reestablish themselves with their disenfranchised voting base.

The ANC has a combined voter support of only 26% in South Africa’s major economic provinces of Gauteng, Western Cape and KwaZulu-Natal, which make up 63% of the country’s GDP and 56% of the population. At the provincial level, forming a coalition in KwaZulu-Natal without the MK party could be problematic, especially given Zuma’s recent disruptive comments. While most analysts agree that the least likely outcome would be a MK/ANC coalition, the ANC still needs to deliver a sustainable solution that will gain support from their disenfranchised base in the KZN.

Regardless of the outcomes of a coalition, President Ramaphosa will continue to do things by the book and “clean up” the ANC.

The average GDP growth rate fell from +4.2% during Mbeki’s presidency to +1.8% during Zuma’s tenure as result of the end of the commodity super-cycle, corruption, and maladministration, which drove foreign investors away. Although Cyril has been slow to address the problems of the post state capture administration he inherited from Zuma, his “by the book” methods has facilitated the law to take its course against his allegedly corrupt comrades. Cyril’s attempts in a “clean up” have resulted in the introduction of new boards at SOE’s, lifestyle audits and the strengthening of SA’s law enforcement.