Are we experiencing Ramaphoria 2.0?

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This appears to be a tentative vote of confidence in the Government of National Unity (GNU), with 18 opposition parties now occupying ministerial or deputy-ministerial positions.

The question is whether this is another 'Ramaphoria moment' or if our optimism is justified this time around. There are some encouraging signs that the GNU is injecting fresh air into the national government in portfolios such as farming and Home Affairs.

However, the reality is that the benefits, or potential benefits of the GNU, will only become apparent over time as policy reforms are implemented. It is also important to consider how things might have turned out if the election had gone differently, to fully appreciate the advantages we have seen so far.

While the rand has strengthened since the elections and the formation of the GNU, this improvement is largely attributed to a weakening dollar. Consequently, the real benefit for our currency has been limited, which likely accounts for the cautious commentary regarding whether this development is genuinely positive.

However, had there been a coalition between the ANC, the MK, and the EFF, we would likely have seen a much weaker rand. This could have led to further deterioration given other indicators. For instance, more controversial reform proposals such as the National Health Insurance (NHI) and prescribed assets might have gained traction, which could have further dampened market sentiment.

Additionally, foreign relations might have suffered if a coalition government with left-wing parties had been formed. Instead, we have observed not only some strengthening of our currency but also a gradual return of foreign investors.

Investor sentiment shifts

In the first five months of 2024, South African equities and bonds experienced average outflows of around R10bn per month. Post-elections, we observed an inflow of R4.5bn in June and R5.8bn in July. This indicates that foreign investors may be starting to reassess their view of South Africa, contributing to rallies in both bonds and equities.

With our currency not only stable but slightly stronger, and inflation remaining steady, the focus has shifted from potential interest-rate hikes to the possibility of a rate cut in September.

Upward revisions in GDP forecasts and positive assessments from major global banks also reflect an improving outlook. Additionally, some controversial reforms have been paused, now requiring a majority vote from the GNU members to proceed. The strength of the GNU government lies in achieving broader consensus, which is integral to its purpose.

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Despite these early wins, there is still considerable room for improvement. Given the rand's current strength relative to the dollar's weakness, there is potential for further appreciation. Bond yield spreads have declined, but the spread relative to US bonds remains substantial.

We believe there is still potential for further rallies in our bond and equity markets. Although global sentiment towards emerging markets remains weak, South Africa is now more attractive than it was a few months ago.

Looking at potential further catalysts, the most immediate factor is interest rates, with any decreases being beneficial. We expect rate cuts of 75 to 100 basis points over the next 12 months, which will be favourable for our listed companies and support earnings. This could generate further renewed interest in South African assets.

Guarded optimism needed

However, we should guard against being overly optimistic. There is no doubt that we will encounter friction within the GNU, given the significant philosophical differences among the parties regarding various policy areas. But ultimately, we need a good mechanism for governing controversial issues.

We have a stronger constitutional democracy post these elections, with a centrist anchor in the new government that outweighs the populist extremes that we have seen in the previous structure.

The whole mechanism is also far more conducive to improved scrutiny over policy, decision-making and the efficient allocation of resources. For example, some believe that by just reducing waste and corruption in the current healthcare budget, we could still achieve universal healthcare, without the implementation of the NHI bill in its current form.

With the GNU in place, we can expect a higher level of oversight and a more thoughtful approach to finding practical solutions. Given the government's limited resources for various projects, it's crucial to spend carefully and wisely.