#Elections2016: Assets may extend gains

Bonds and the rand may extend gains as the ruling ANC’s election bruising adds pressure on it to introduce economic reforms.

Johannesburg - South African assets including bonds and the currency are set to extend gains as the ruling African National Congress’ election bruising adds pressure on the party to introduce economic reforms that will boost growth and cut unemployment.

The rand gained for a third day on Friday, rising 0.2 percent to 13.6868 per dollar, the strongest level on a closing basis since October. Yields on government rand bonds fell to the lowest since November, dollar yields declined and the cost of insuring the nation’s debt against default dropped to a nine-month low.

President Jacob Zuma will face renewed calls to quit after partial election results showed the ANC losing outright control of the capital, Pretoria, and Johannesburg in its worst electoral showing since apartheid ended.

With 86 percent of ballots counted, the ANC had less than 55 percent of total support in the country, down from 63 percent in the previous municipal poll in 2011, while support for the main opposition party, the Democratic Alliance, climbed to 27 percent, from 24 percent.

Read also: Rand stronger on #Elections2016

“Since President Zuma has been in power the reform process has been almost non-existent,” said Lars Peter Nielsen, a senior money manager at Kolding, Denmark-based Global Evolution A/S, which oversees $2.5 billion. “If we see a stronger DA, that will be very supportive for both the bonds and currency. We’ve been relatively optimistic about potential changes in South Africa after local elections.”

Neilsen said he would consider moving from a neutral-weight position in South African assets relative to the benchmark to an overweight position if Zuma’s power were diminished and “the more market-friendly forces” in the ANC took on a bigger role.

Zuma’s ANC, widely credited with ending white-minority rule, now faces almost daily demonstrations over the failure of the government to create employment and address poverty in a country where 27 percent of the working-age population is without jobs and the economy has stalled. The central bank expects zero growth this year and sees risks of a recession, while the nation’s credit rating is at risk of being cut to junk in December. A succession of graft scandals implicating Zuma, 74, has fuelled discontent.

Low growth

“The results are indicating that the drop in support is significant and it’s real,” said Rashaad Tayob, a portfolio manager at Cape Town-based Abax Investments, which manages $5.8 billion. “This will continue to put pressure on the ANC and Zuma in particular. It’s positive for the bond market if that happens; the issues that South Africa has been facing in the last few years in terms of low growth and very low confidence have a lot to do with the politics.”

Yields on South African government rand bonds due December 2026 dropped two basis points Friday to 8.54 percent, after falling 10 points on Thursday. The bonds have returned 52 percent since the beginning of June as the yield tumbled 86 basis points. While bonds could extend gains, the rally makes them expensive for Abax, Tayob said.

Bonds ‘expensive’

“Unless we’re confident that the domestic issues and the ANC’s internal battles are going to have a positive resolution, unless we’re confident of that, then we think bonds are expensive here,” said Tayob, who sees value in the 2026 securities at a yield nearer 9 percent.

Rates on South Africa’s $2 billion of notes maturing in September 2025 fell one basis point to 3.94 percent after dropping 12 points on Thursday. The premium investors demand to hold the nation’s dollar debt rather than U.S. Treasuries narrowed seven basis points to 291, while the cost of insuring the debt using credit-default swaps fell two basis points to 241.

“The market has reacted positively to the result based on the view that the lower share of votes may allow more fiscally conservative members of the government more freedom to push ahead with reforms,” BNP Paribas strategists said in a report on Friday.

BLOOMBERG