South Africa is at a major political and economic inflection point, writes Oliver Bell, portfolio manager of the T. Rowe Price Middle East & Africa Equity fund and Frontier Markets Equity fund.
With Jacob Zuma's resignation as national president of South Africa on Wednesday, we believe the country is likely to see a major reversal of fortune in the coming years under the stewardship of Cyril Ramaphosa, the recently elected ANC president and now the incoming national president.
The anti-corruption drive is absolutely vital to restore confidence in a country where such confidence has been sapped over recent years, as headline news of alleged corruption has implicated former President Zuma and a patronage network beneath him. Zuma's resignation is an indication about how serious the country is to tackling this.
With Ramaphosa - a former union leader and subsequently a very successful and now wealthy businessman - leading the country, we expect to see a cleaning out of all those implicated and a restoration of the strength of institutions South Africa has always had.
The markets and currency have run hard since the December election of Ramaphosa, but from our recent trip it was clear there was still scepticism locally and no one is positioned for a continuation of good news and positive catalysts.
These potential catalysts include a reshuffle of the cabinet to bring a team of competent ministers, as well as Ramaphosa's delivery of the state of the nation speech this Friday, in which he will lay out his vision.
There is also the delivery of the budget a week later, where the government needs to show commitment to fiscal consolidation. This could lead to a delay in the credit rating downgrade by Moody's and thus lead to interest rate cuts by the staunchly independent central bank, reinforcing the positive virtuous circle.
The political developments come at a time when South Africa is at a cyclical economic bottom. Therefore, on top of the above catalysts, positive macroeconomic figures may surprise in coming quarters - largely due to underestimated pent up demand and a restoration of confidence, which will then be reinforced by likely structural reforms from the new government.
T. Rowe Price's Middle East & Africa Equity fund has been buying domestic South Africa equities throughout the last year in anticipation of these events and is currently significantly overweight this segment of the market.