Africa’s two largest economies will hold elections this year, and there’s a good chance the outcomes will lead to slightly faster growth and higher asset prices. But rising populism and nationalism remain a longer-term risk.

Together, Nigeria and South Africa account for roughly 40% of Africa’s gross domestic product (GDP). While their political dynamics differ, the two countries are both struggling with negative per capita growth and high unemployment (Display).

Both economies need radical change, but that’s easier said than done. So far, neither government has developed a strategy for solving these problems, meaning job-creating economic growth will be in focus when voters go to the polls.

The good news is that the risks often associated with African elections—last-minute spending sprees, ruling parties’ historical reluctance to relinquish power—have faded. Although recent instability in Gabon and Democratic Republic of Congo were reminders of African political risks, we’ve seen a number of peaceful and market-friendly transitions across the continent.

In Nigeria, Oil Still the Kingmaker

Power changed hands peacefully in Nigeria in 2015. But since Nigeria is one of the world’s largest oil producers, declining oil prices at the time meant that incoming President Muhammadu Buhari inherited a slowing economy. His government has struggled to turn things around, and his approval rating collapsed from around 80% after being elected to roughly 40% a year later.

Even so, Buhari seems to have a slight edge heading into the February 16 election. But his main rival, former Vice President Atiku Abubakar, is seen as slightly more market friendly, and could stage an upset in what’s almost certainly going to be a close election, in our view.

The two men’s party platforms and policies are not that different, but we suspect the market would cheer an Abubakar victory simply because it would shake up the uninspiring status quo. Abubakar has implied that he would support a more flexible exchange rate for the naira, a precondition for the country to be added back into global bond indices.

But for most investors, the bottom line has a lot to do with oil prices. If prices rise, the next president—whoever it is—will likely have more success implementing structural changes; if they fall, he’ll struggle. That’s just the luck of the draw for any Nigerian president, given the country’s dependence on oil.

Building on South Africa’s Progress

South Africa, on the other hand, got a dose of political change when Cyril Ramaphosa became president of the ruling African National Congress (ANC) in late 2017 and then president of the country nearly a year ago when his predecessor, Jacob Zuma, resigned.

Markets welcomed the change, but optimism has since faded as the depth of domestic corruption and institutional decline came to light. We think South Africa is healthier today than it was a year ago, but many of the social and economic challenges that the ANC inherited in 1994 at the end of apartheid have not been addressed.

To be fair, Ramaphosa has made significant strides over the past 12 months. According to recent opinion polls, the ANC should be able to win about 60% of the vote when the election is held—most likely in May. That’s important, because we think the bigger the margin of victory for Ramaphosa, the stronger his mandate for change.

The Elephants in the Room

We think economic growth in Nigeria and South Africa could accelerate after the elections on greater certainty and improved consumer and business confidence. But we expect real GDP growth to remain subdued in 2019—a touch above 2% in Nigeria and roughly 1% in South Africa.

Even so, we’re expecting asset prices to rally in both countries despite the macroeconomic challenges. Nigerian assets are likely to rise more if Abubakar wins. In South Africa, a strong showing for Ramaphosa could lead to sharp gains.

Bond prices in both countries seem to offer value and look to be on favorable trajectories (Display) in 2019 despite the macroeconomic challenges.

But what’s good for local assets and markets might not be good enough to create job-generating economic growth. Without meaningful economic improvements, conditions will be created for a rise in populist sentiment and policies, with politicians moving to the left.

That’s why we think investors should consider these risks before getting too bullish:

1. The global economic cycle and China. If the slowdown in global growth accelerates, emerging-market (EM) and frontier economies will suffer—especially if it turns into a recession. The wild card is China. A sharper-than-expected slowdown in the world’s No. 2 economy would reduce trade and commodity prices. China’s growing need for current account deficit financing could also increase competition for capital flows.

2. Divergent asset prices and economic fundamentals. Investor optimism is pushing down risk premiums on local assets and causing prices to rise even as macroeconomic fundamentals stagnate. We don’t think rising asset prices are likely to spark meaningful acceleration of economic activity in Nigeria and South Africa.

Dependence on commodities is a risk. So is the general global drift toward more populist policies, which in these countries could worsen their fiscal trajectories.

3. An election surprise. This is a slightly bigger risk in South Africa. If the ANC underperforms and the more radical Economic Freedom Fighters party does better than expected, investor concerns about land expropriation without compensation and nationalization will flare up.

A smooth election process will be good news for both countries, and predictable results will encourage investors and should boost asset prices in the short run.

But investors should not be surprised if the results don’t automatically lead to all the structural changes that would usher in a new era for both countries. In today’s challenging environment, the potential for political surprise is everywhere. That means it’s more important than ever for EM investors to be selective about where they take their risk.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom.

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