Keep an eye on the rand as South African municipal elections loom

A change in the electoral regime in South Africa could influence policy decisions and in turn those decisions can have an effect on business, capital inflows/outflows and ultimately financial markets.

Johannesburg Stock Exchange
Source: Bloomberg

Speculation is rife that the DA and the EFF may have made inroads into a number of municipalities, but it is expected that the ruling party should maintain it’s overwhelming majority which should equate to continuity in policy path.

With this in mind, a key focus would be on the 'free and fair' election process and the social reaction which may occur as a result of municipal changes.

The rand

Recently, the changing of Tshwane mayoral candidates by the ANC was met with disdain by the Tshwane public and social unrest in the form of protest, violence and theft resulted. If a large scale event such as the upcoming elections invoke a similar reaction or is broadcast by the media in such a fashion, the recovery we have seen in the rand this year runs the threat of being unwound quite sharply as the negative sentiment is bound to be a deterrent to foreign investment (in the near-term at least) within the country. 

While the rand this year has been affected (for the most part) by external macro-catalysts, the domestic election catalysts (if they were to occur) would likely produce short-term rand weakness to support the longer-term trend of weakness which has been evident over the last few years. In this scenario, upside targets on USD/ZAR from current oversold levels would be considered at R15.20 and R15.75 respectively.  

The stock market

If a weaker rand was to materialise as a result of social unrest pertaining to election time, it may not necessarily equate to overall weakness on the local bourse. The top ten companies in terms of market capitalisation on the Johannesburg Stock Exchange (JSE) make up almost 60% of the value of the exchange. Of these shares, eight out of the top ten derive the majority of their respective earnings in foreign currency. These companies are as follows: Anheuser-Busch Inbev, British American Tobacco, SABMiller, Naspers Ltd, Glencore, Richemont, Billiton and Steinhoff International. The rand hedge attributes of these share could provide a defensive edge in the aforementioned scenario.

South Africa does however have a peaceful election history, and if the past has any bearing on the future, then we can expect business as usual through the municipal elections, although one can’t help wondering if the recent trends of violent protests within the country serve as a subtle warning to be heeded.  

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