Trading a bullish and bearish election outcome

In a recent BusinessDay Financial Mail (BDFM) Investment Dialogues event, Garth Mackenzie, founder and editor of TradersCorner.co.za provided the following analysis and guidance as to how he is looking at trading financial markets over the 2019 general election in South Africa.

Where are we now?

Cyril Ramaphosa took over the role of South African president in February 2018 (14months ago), following the resignation of former South African president, Jacob Zuma. Cyril has been walking a factional tightrope within the ANC over that time, but has managed to achieve some significant progress post the economic hangover induced by the Zuma era.

Foreign investors have largely shunned the SA Investment markets in recent years and have not yet returned. This has resulted in a de-rating of share valuations on the JSE (SA Inc) and pressuring of the country’s sovereign credit rating.

Are the 8^th of May Elections an opportunity?

Garth has suggested that the upcoming elections could be an opportunity for:

• Cyril Ramaphosa to cement his position for another 5 years
• Cyril Ramaphosa to appoint his own “uncompromised” cabinet
• a pro-GROWTH agenda to play out
• a continued fight against corruption
• Investor confidence to return

ANC share of the national vote

According to Garth the level of ANC support in the upcoming elections is of most significance. He believes that:

• a ‘bearish’ scenario emerges in local financial markets should the ANC receive less than 52% of the vote
• a ‘bullish’ scenario emerges in local financial markets should the ANC receive more than 58% of the vote
• a more ‘neutral’ scenario emerges in local financial markets should the ANC receive between 53% and 57% of the vote

The ‘bearish’ scenario

In the ‘bearish’ scenario the assumptions are that:

• the rand would weaken (R15/$ an initial target)
• Bond yields would rise as bond prices fall
• Domestic SA Inc stocks suffer
• Dual listed rand hedge stocks rise
• Listed property suffers

The ‘neutral’ scenario

In the ‘neutral’ scenario, the assumptions are that:

• The rand trades moderately firmer (below R14.00/US$)
• Bond yields move lower as bond prices rise
• Domestic SA Inc stocks move modestly higher
• Dual listed rand hedge stocks lag the market
• Listed property moves modestly higher

The ‘bullish’ scenario

In the ‘bullish’ scenario, the assumptions are that:

• The rand trades sharply firmer (R13.50.US$)
• Bond yields move sharply lower as bond prices move sharply higher
• Domestic SA Inc stocks move sharply higher
• Dual listed rand hedge stocks lag
• Listed property moves sharply higher

Will a positive election outcome (for the ANC) allow for Ramaphoria part 2?

The below graphs highlight the initial ‘Ramaphoria’ effect on the banking, financial and general retail sectors through the early part of 2018.

Garth goes on to suggest that a positive margin of victory could strengthen the Cyril Ramaphosa mandate and in turn have the potential for a round 2 of gains evident in these sectors.

Five stocks Traders Corner believe to be well positioned for a ‘bullish’ election result

In the ‘bullish’ election scenario Garth is keeping a close eye on the below stocks. These companies are highly liquid SA inc shares which would benefit from a stronger rand and and a historic a foreign investment appeal.

In terms of a technical view:

FirstRand Ltd

Remains in a long-term uptrend. In the shorter term however, the stock is has moved into a triangle shaped consolidation. Garth Is looking for a break above the upper trend line before targeting a move back to the recent high just above the 7500c level.

The Foschini Group

The long-term trend remains firmly up for Foschini Group Ltd. In the short term, the price looks to be breaking out of a triangle shaped consolidation similar in nature to that of the Firstrand chart. A slight pullback from the breakout could afford traders long entry targeting a move back to the recent high.

Sanlam

The Sanlam Ltd setup is similar in nature to the preceding Firstrand and Foschini charts but arguably of a less mature nature. The breakout level for long entry is considered at around 8000c.

The Clicks Group

The Clicks Group Ltd, whilst having some of the characteristics of a defensive counter through its discount pharmacy business, has continued to show its resilience across different economic climates in SA. A break above trend line resistance would consider the initiation of new long positions.

Bidvest

The Bidvest Group Ltd chart shows the price to have broken out of a short term consolidation. The breakout now aligns the short term trend with the long term uptrend. While the 22000c level remains a key level of support to watch into the elections, the price trading above it considers 24500c the next upside target for short term traders.