The rand has erased the year’s losses and South Africa’s benchmark stock index closed at the highest level in more than nine months as investors positioned for a market-friendly outcome in the 29 May election.

The currency is one of only three among 23 emerging markets monitored by Bloomberg that haven’t weakened versus the US dollar this year. A 26 April Ipsos poll marked a turning point for investors fretting over the risk that a poor showing by the ANC could lead to an unpredictable coalition government.

“The recently released Ipsos poll revealed that while the ANC will likely lose its majority, a coalition with a less market-friendly political party may be avoided,” said Brendan McKenna, emerging markets FX strategist at Wells Fargo & Co. “Optimism for a degree of policy continuity post-election is pushing USD/ZAR lower over the last few weeks.”

The rand gained 0.4% to R18.37/US$ on Monday, the strongest closing level since 29 December.

For the first time since white minority rule ended three decades ago, South Africa is heading into national elections in which an outright winner isn’t apparent. A series of opinion polls show the ANC risks losing its majority in the 29 May vote and may have to enlist the support of one or more rivals to continue governing.

At the heart of investors’ concerns has been the prospect of a shift to the left in government policy. There has been speculation that the ANC could form an alliance with the more radical Economic Freedom Fighters or newly established MK Party.

“From an investor perspective, the election is binary — either assets will rally post the outcome or they will weaken substantially,” said Kim Silberman, macro strategist at Matrix Fund Managers.

Where to next

Silberman said offshore investors were likely to be underweight South African assets and a market-friendly outcome could see the currency rally towards R18/$ or below, “before settling at around R18.50 after the initial relief”, she said.

In the event of an extremely market-unfriendly outcome, the rand could weaken towards R21/$ and bond yields could rise by as much as 150 basis points, Silberman said. That would take the generic 10-year yield to about 13.5%.

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South Africa’s benchmark stock index climbed a seventh day on Monday, its longest winning streak since June 2021. That’s taken the 14-day Relative Strength Index to 76.3, the highest level since November 2021. A level above 70 is seen by some technical traders as an indication that the market has risen too far and too fast.

Still, some strategists expect more gains based on past election outcomes.

“South African equities have historically traded well in the three months leading up to the elections,” said Goldman Sachs Group strategists including Sunil Koul in a note to clients. “On a median basis, returns have been modestly positive in one and three months after the elections, although with wider variance within individual elections.”

Meanwhile, investors have been piling into South African local-currency bonds, with inflows reaching a net R13.3-billion on Friday, the second biggest daily inflow since records began in 2019. — Colleen Goko, Mpho Hlakudi and Adelaide Changole, (c) 2024 Bloomberg LP