So, another election has come and gone.
While I truly am grateful that we find ourselves in a position in South Africa where we have the opportunity to vote in a (mostly) free, fair and peaceful election, I’m pretty convinced the elections are a red herring from a local investment perspective.
In my opinion, way too much ink has been spilled speculating how the markets and currency may react in various election outcome scenarios. I say this for two reasons.
First, in South Africa, voting patterns don’t change dramatically (as was once again proved this week, give or take a few percentage points here and there) and I think the big money knows it. This means that most of the election related news was already priced into the currency and markets well before voting day.
Second, as much as we like to think we are the shizness, the reality is that the South African economy and in particular the Rand, is like a packet of Simba chips blowing in the winds of the global economy.
According to the findings of a 2016 IMF Working Paper – “Surprise, Surprise: What Drives the Rand / U.S. Dollar Exchange Rate Volatility?” – the primary drivers of heighted Rand volatility are increased global volatility and increased commodity price volatility for South Africa’s main export and import commodities. The study found that the country’s local political uncertainty is only moderately correlated with its own currency volatility.
The study also finds that when it comes to economic data surprises, only U.S. surprises matter for rand volatility. South African surprises, including inflation surprises, do not enter as significant explanatory variables.
It seems likely therefore that any major moves in the Rand (and the JSE for that matter) immediately before, during and after the elections can be attributed more to global volatility caused by economic data and US-China trade deal issues, rather than any changes (or lack thereof) in the local political landscape.
It might be a hard pill to swallow but the reality is that Donald Trump’s twitter thumb likely has a more powerful effect on our currency and markets than does our election process and outcome.
South African investors would do well to keep this in mind when they see the inevitable headlines linking market and currency movements exclusively to the elections.
In the longer term, it remains to be seen whether President Cyril Ramaphosa has the political will and means to push through market friendly reforms and whether these will be enough to turn the ship around. But that’s a story for another day.
Have a great weekend Wealthwokers