Investors Too Pessimistic About South Africa’s Elections, Ninety One Says

(Bloomberg) -- A fund manager at South Africa’s largest investment firm believes there’s a low probability that the ruling African National Congress will coalesce with leftist parties after this month’s elections should it fail to get a national majority.

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Ninety One Ltd.’s view contrasts with that of other investors, who appear to be pricing in a scenario in which the ANC’s support drops to around 40% after the May 29 vote, leading it to tie up with the Economic Freedom Fighters, or uMkhonto weSizwe Party. Both parties favor the nationalization of the central bank and land expropriation without compensation.

Read more: Zuma’s Party Wants to Nationalize Land, Mines in South Africa

The valuation and positioning that investors have taken on the country’s locally focused stocks indicates that the market is 80% sure of such an outcome, Ninety One Value Fund’s portfolio manager, John Biccard, said in an emailed note.

“It is difficult to see probabilities of these two events to be high enough to match the market’s expectations,” he said. “Consequently, our entire domestic equity positioning in the Ninety One Value Fund — outside of 35% offshore and 10% in gold shares — is invested in ‘SA Inc.’”

So-called “SA-Inc.” companies are currently trading at the largest valuation discount ever relative to both the MSCI Emerging Markets Index and the MSCI World Index.

Ninety One sees a 50% probability that the ANC will get less than 40% of the vote, and a 20% chance that it would then partner with the EFF or former President Jacob Zuma’s MKP. “We therefore see the probability of a bad outcome as only 10%, a stark contrast to what the market appears to be pricing in.”

An Ipsos poll released on April 26 shows ANC support at 40.2% compared with the 57.5% it won in the 2019 election. It also suggests the EFF may get around 11.5% of the vote and MKP 8.4%.

Bloomberg Terminal clients can click on ELEC ZA for more on South Africa’s elections

The value fund favors companies that are trading close to their Covid-19 lows, including Life Healthcare Group Holdings Ltd., Netcare Ltd., Spar Group Ltd., Reunert Ltd. and Absa Group Ltd.

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