JPMorgan double upgrades SA to 'overweight' as JSE, rand rally on post-election optimism

JPMorgan, the world's largest bank by market value, has double upgraded SA assets on optimism that the new government of national unity (GNU) was likely the best post-election outcome for the country's economy.

The US banking giant upgraded SA from underweight to overweight in its Central Europe, Middle East and Africa (CEMEA) asset allocation, saying the tie-up between the ANC, DA, IFP and PA could usher in large offshore inflows into SA assets in the near-term. While JPMorgan said its short-term upgrade could continue into the long-term, it cautioned that risks to its assessment were that no Cabinet was in place yet and the GNU structure had not been tried in almost 30 years.

S&P Global Ratings also said on Tuesday that the GNU's nine-point agenda aims to prioritise structural reforms to address basic infrastructure and service delivery shortfalls and weak investments, while gradually narrowing fiscal deficits.

It said this would likely not cause any significant policy shift in SA and was "broadly favourable" for SA's economic and fiscal outlook, though it cautioned the GNU may struggle to achieve both economic growth while maintaining fiscal discipline given the risks of navigating coalition politics.

"Now that more clarity has been provided around a GNU - people have actually signed documents and agreed to work together - the market enjoys the fact that there is more certainty around leadership," Hannes van den Berg, portfolio manager at Ninety One, told News24. 

"If you look at some of the objectives that have been agreed upon, it seems that the public and private sector working together is coming through strongly along with a commitment to reform, economic growth and the independence of institutions. All of this is driving positive sentiment."

SA stocks and the rand rallied as the post-election optimism and improved global risk sentiment buoyed demand for local assets. So-called SA Inc stocks, those highly correlated to the local economy, led the equity surge while the rand edged closer towards the R18/$ mark, trading at R18.11 just after midday. The JSE All-Share index rose 2.9% to 79,271.64 with insurers, banks, retailers, listed property counters and some commodity stocks leading the advance.

Capitec jumped almost 8% to R2 554.25, Nedbank rose more than 7% to R254.35 while Standard Bank climbed 6.6% to R212.52 and Absa gained 5.1% to R174.44. Shoprite rallied 6.4% to R281.40 while TFG was up 6.6% at R126.91.

Old Mutual surged almost 11% to R12.52, while Sanlam rose 8.5% to R82.94. Listed property counters also advanced, with Hyprop Investments rising 6.3% to R31 while Redefine gained almost 5% to R4.15.

"The performance of the SA market is being driven by a good news SA story, aided by a positive global environment. Almost all global equity fund managers are underweight SA, and it now presents one of the most compelling stories in the world in the short term," said Peter Armitage, CEO and co-chief investment officer of Anchor Capital.

"The elections turned up a material positive surprise and the strengthening rand means inflation could reduce and interest rates cuts could be sooner than expected. Add to that less load shedding and more consumer demand from cash withdrawn due to new pension rule changes. Big liquid SA-orientated shares like banks, insurers and retailers are having their best run in years." 

SA assets also gained on renewed hope the US Federal Reserve may begin cutting interest rates this year after US inflation data came in better-than-expected last week, boosting higher yielding assets across the globe.

"SA investors have not had this positive cocktail for many years," said Armitage. "This still leaves many of these shares at historically very low valuations, and there is plenty more room to run."

Bianca Botes, a director at Citadel Global, said local equities are still considered cheap, which provides investors with a good buying opportunity. She added that the rand also remained undervalued at current levels and could gain further momentum on the back of the post-election optimism and as global monetary policy eases.

"The rand shed a significant portion of its risk premium following the smooth formation of a government of national unity," said Botes. "The focus now shifts to which individuals will occupy Cabinet positions, with the DA pushing for positions of economic power, including public works and finance."

Despite its general optimism on the GNU, S&P Global Ratings predicted SA's economy would expand by just 1.1% in 2024 and average growth of 1.3% between 2025 and 2027, compared to just 0.6% in 2023. Though it said increased political participation from the more market-friendly DA could help drive much-needed economic reforms, it expressed concerns over ideological differences with the ANC and whether the coalition structure at national government level was workable in the longer term.

"Despite the reasonably constructive outcome, significant ideological differences between the ANC and the DA on issues such as affirmative action and foreign policy could destabilise the government," S&P Global Ratings said.

"At the provincial and municipal levels, coalitions have been volatile and resulted in a high turnover of mayors. Moreover, attempts by the main left-leaning opposition parties, uMkhonto weSizwe (MK) and Economic Freedom Fighters (EFF), to block legislation could increase instability."