According to Deutsche Bank, 2024 will see the most people vote in a single year in recorded history. As speculation fuels heightened uncertainty around the world, Thalia Petousis discusses the impact of elections on financial markets.
The year of the great election has commenced and a swing to the right is sweeping through the polls and flooding into ballot boxes. This is evident in the US, with strong polling figures for Donald Trump and the Republican Party; in the United Kingdom, where Nigel Farage’s far-right Reform UK party has eroded some of the support base of the more temperate conservatives; in Germany, where the Social Democrats and Green Party have lost voter share while the prospects for the far-right Alternative for Germany (AfD) party have lifted with the conservative tide; and in France, where Marine Le Pen’s right-wing Rassemblement National party significantly increased their seats in parliament.
These elections have arrived just two years after the highest levels of developed market inflation seen in 40 years. History doesn’t repeat itself, but it often rhymes. In the Winter of Discontent following the high inflation of the 1970s, Margaret Thatcher led the Conservative Party to reach three landslide victories in the decade thereafter. The current “winter of disconnect” is not only fuelled by a reduction in purchasing power and social inequality but is also deeply rooted in the anti-illegal immigration movement.
Election predictions and results continue to influence markets
The results of elections and polls are having divergent impacts on financial markets. French bond spreads have reached their weakest levels versus German bonds since 2012, presumably reflecting unease around the future path of government spending. In the US, however, the S&P 500 has recorded new highs, boosted by a buoyant consumer. US households’ equity exposure has risen to the highest levels since 1968, and the prospect of a Republican Party win could bode well for a lower or more muted path for capital gains tax.
In South Africa, the election results reconfirmed the polls that came before them – a large loss of voter share from the African National Congress (ANC) to Jacob Zuma’s uMkhonto weSizwe Party (MK Party) in KwaZulu-Natal. In the days that followed, the market roiled as coalition outcomes were debated, but the MK Party’s disorganisation, infighting, constantly changing member list and radical manifesto have made it too unruly to enter coalition discussions. Similarly, there were already mutterings pre-election from within the ANC that earlier provincial coalition partnerships with the Economic Freedom Fighters (EFF) had been damaging to the party. Thus, the formation of a government of national unity (GNU) took place – sans the EFF and MK Party.
In South Africa, local bonds and equities have posted an 11% and 12% annualised year-to-date return, respectively. The SA 20-year bond yield has declined from a year-to-date high of 13.2% to as low as 11.9%, reducing the cost of funding for government. This reflects market exuberance with the results of the SA elections and the formation of a GNU, which includes the Democratic Alliance. A more confident SA market and a stronger rand can also bleed into lower imported cost inflation and therefore has the potential to ease inflationary pressures from fuel and certain food items. As such, the SA market now prices for two to three interest rate cuts over the next two years.
During 2017, market exuberance following Cyril Ramaphosa’s election as president of the ANC saw a similar move in bonds. Ramaphoria, as the period came to be known, saw the 20-year bond spread versus US Treasuries decline from a 725 basis points (bps) spread to a 560bps spread, or roughly a 13% capital return over just three months. Currently, the 20-year spread is at 753bps versus US Treasuries, reflecting that SA bonds are in fact cheaper now than they were pre-Ramaphoria on a relative valuation basis, given our larger debt load and more severe interest service burden. Does this mean that this rally has longer to run if foreigners sustainably return to SA bond markets?
Casting one’s eye one year forward from Ramaphoria to December 2018, yields were again wider and the capital gain versus pre-Ramaphoria had collapsed to just 3% with the rand weaker alongside it. A lesson to be learned from this experience is that given the interwoven nature of the global economy and consumed goods, the path of interest rates can struggle to sustainably decline if global inflation misbehaves. In 2018, US inflation deviated from the Federal Reserve’s 2% target and rose to close to 3%. The inflation figure is similar today. In May 2024, US inflation printed at 3.3% and the seven exuberant interest rate cuts priced into markets back in January 2024 have yet to materialise. The US labour market continues to be robust and consumers have been spending record amounts on items like travel.
South Africa needs meaningful change
A more imperative takeaway from the Ramaphoria period is that political goodwill alone cannot change the path of our country. For this time to be different, we need highly capable leaders to execute their mandates effectively after many years of decline in key government departments. Only the right mix of ingenuity and skill can improve South Africa’s growth prospects and ultimately reduce unemployment. Some political parties have, for example, put forward ideas for revamping Home Affairs and resolving the ongoing tourist visa issues which frustrate this sector of the economy.
Strong leaders in the right roles in key departments could have a tangible impact, as we saw when Edward Kieswetter turned the South African Revenue Service (SARS) around after state capture had eroded its operational ability and institutional integrity. Only time will tell if we can see a similar rebuild take place on a grander scale as the GNU and newly minted ministers find their feet.