Does the market even care about the elections?

With the country set to go to the polls on Wednesday (8 May), alarming headlines can evoke emotional responses that prompt us to question how our investments, such as our retirement savings, are positioned, says head of investments at 10X Investments, Chris Eddy.

When it comes to investing, however, it rarely pays to act on news already publicly available; the markets are just too smart for that, he said.

South Africa’s problems are well documented. They include low growth, high unemployment, government debt, and Eskom – all of which have been priced into the market.

“Asset prices – be it shares, bonds, property, currency or commodities – are forward-looking. They reflect all known information, as well as collective expectations and risks (on the up and the down) of all investors. It’s new information that moves markets, not what’s already known.

“By implication, the current market price of any asset is fair given the current risks, and there is no advantage to be had by studying existing information,” Eddy said.

The market is a large, finely calibrated machine being fed information as it becomes available. All new information is discounted, or priced in, almost immediately. Stock prices are said to move randomly, not because prices move erratically, but because new information arrives in a random or unpredictable fashion, he said.

“If the ‘news’ lines up with expectations, it cannot be classified as ‘new’ information (even if some hear it for the first time). Rather it is ‘old’ information, already discounted in the price. This nuance can catch out armchair investors who may trade on such news – for example, a big jump in reported earnings – unaware that this is what the market had expected.”

Eddy said that to take a calculated bet against the current price of a financial asset, the investor must understand what information is already discounted by the current price.

“They must believe they are right and the market (ie, everyone else) is wrong. That’s possible, but not very probable.”

He said that the likely outcome of the May 8 elections is that the ANC will stay in power, but with a smaller majority. This has already been discounted by bond, currency and share markets.

The beneficiary of the ANC’s reduced majority is likely to be the EFF, indicative that more voters see it as a viable alternative to ANC’s corruption and incompetence, or, more likely, because its populist policies resonate with them.

“If there is an even sharper shift to the left, investors are likely to be unnerved, in terms of the long-term direction of our politics, and what the reaction will be from Moody’s, the rating agency that decides whether we keep our investment grade rating or not. We should then expect a negative response in bonds and the rand,” Eddy said.

Alternatively, a stronger-than-expected showing by the ANC could be seen as an endorsement of president Cyril Ramaphosa’s anti-corruption stance, and his more investor-friendly rhetoric and turnaround plan for the country. Such an outcome might boost sentiment, the investment specialist said.

“None of these considerations are unique, however. You could position your portfolio based on your beliefs (or deep insights). But know that the market has already contemplated all of the potential outcomes of this election, and priced in the most probable one,” Eddy said.

Market poll

A recent poll run by research group Intellidex, gauged the market’s views on the elections. It polled onshore and offshore investors, investment banks, institutional stockbrokers, private banks and private wealth managers.

According to the survey results, the market sees the ANC securing between 57% to 58% of the national vote, with the DA expected to get around 19% to 22%. The EFF meanwhile ranges between 9% and 12%.

Many local analysts and economists have touted the 60% support level as the share of the vote the ANC needs to secure president Cyril Ramaphosa’s reform mandate, which will lead to a rally in the market.

However, according to Intellidex’s findings, there are very few in the market who agree with this view, with no real consensus for which level of support the ANC needs to get a positive market outcome.

The general range among investors who believe that a threshold exists for Ramaphosa’s ANC to secure a mandate ranged between 55% and 60% – and the threshold for a market rally also varied greatly, between 55% and 61%.

Intellidex said that the results show that there is scepticism among investors as to whether such a threshold even exists.


Read: What a big loss for the ANC in the 2019 elections means for South Africa

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Does the market even care about the elections?