The EFF/MKP saga has been interesting for a number of reasons. Obviously the actual story itself — but more so watching the reaction of market participants. In the same way people like watching gory horror movies, there is something of an obsession with people watching EFF palace politics.

Many a seasoned market participant easily gets seduced by various undercurrents of otherwise fake news, such as that glossy EFF (or ANC) goings-on mean support and so vote share in the real world, or indeed the “interventions” of Helen Zille fly round the market faster than even the latest CPI print.

This is not to say that there are not interesting and indeed concerning far-out-the-tail risk scenarios of EFF governments and the rest. The point is to do the appropriate research to form a judgment on the probabilities of these scenarios. What we often find then is that people vastly overplay the probabilities of such tail risks — assigning say a 25% chance to something that has much less than a 5% chance of happening.

This is what happened before the elections when the market dug quite deep down a pathway for a number of months at the start of this year on ANC/EFF coalitions and the fact that somehow a tie-up between the two was “obvious” and natural. This misread the balance of views in the ANC national executive committee (NEC) and the control and influences over the process of coalition formation, and tapped into something deep where people assume the NEC is some mad left-wing organisation that is about to nationalise everything rather than one at the end of its tether trying (grudgingly) what is left, which is private sector involvement in the economy.

Of course there were possible routes and outcomes to an ANC/EFF coalition — in particular a shock scenario where the DA played hard ball and didn’t compromise as it did. But the point is this was a tail risk and not a near baseline — which is what a significant chunk of the market assumed for some time.

People in the market then like to push back, saying that sure the probabilities may be over-egged but the outcomes need to be considered — that is, the probability weighted outcome. There is a small minority in the market who always think that something such as an EFF or even an MK party government would be all fine — because look at the Jacob Zuma years, they were fine right? Such views betray, it seems to me, scant regard for the effect of lower growth and high unemployment and misplaced potential for the country during that decade. Anyway — most people then like to say “oh but this outcome, even if such a low probability, is so disastrous that the probability weighted outcome is still super bad”.

We’ve seen this play out in the past few weeks as the EFF/MK churn has occurred. Suddenly, a sizeable segment wants to consider upping meaningfully the risks of MK winning the next election or there being a broad realignment of the left or progressives (though those terms always seem grossly misplaced — there is nothing more progressive than wanting to solve the affordability of the grants system and solving the unemployment crisis than through growth-led reforms).

Such a diagnosis seems to overestimate the ability for Floyd Shivambu to bring order to a personality-driven cult. (This is something one might label the EFF, but Julius Malema always knew and understood fully the need for a strong and regimented multilevel regional and branch structure from his ANC Youth League days — something the MK operates largely without or only in the most chaotic form.) It also seems to overestimate the pull of the MK party as a narrow draw, particularly in KwaZulu-Natal, which is difficult to transfer nationally, and seems more broadly to misunderstand that the average voter does not run around quoting Karl Marx.

Perhaps I am being slightly mean to this chunky part of the market. There are equally a large set of people cheering on the collapse of the EFF who predicted they would be nowhere since Malema left the ANC and probably overestimate their fall at the next election (even if they will likely slide a bit further — being a party of two halves — the cos-play elements and the intellectual Marxist-Leninists).

The most likely outcome, it seems to me, is that the MK and EFF combined vote share at best is flat and likely falls somewhat in 2029 as the intellectual student and recent graduate radical parts of the EFF would likely not want to follow Shivambu to the MK with all the Zuma baggage — and either stay in the EFF or else drift to not voting.

Why is this all so important? Because the yield curve has been flattening slowly but steadily and the rand is somewhat less volatile since the middle of last year, in response to the government of national unity (GNU) environment and, in particular, a better Treasury debt issuance management strategy and better Reserve Bank liquidity management.

Yet even given all this — and better fiscal outcomes more likely than the consensus expects and somewhat contrary to shock headlines in this paper recently on the subject of fiscal underperformance (properly accounting for seasonality we find only a marginal underrun of revenue and think the Treasury can still broadly hit February targets) — there is still a dynamic of scepticism and negativity.

As I commented in my last column, this is about fiscal and structural reform, but it is also about politics and broad views on the sustainability of the constitutional order and the rule of law. While state capture was a severe threat to this, the fact it did not survive and was cauterised eventually seems to have been overlooked rather too quickly. The risk I see is that the curve gets stuck — still quite steep because there is a quite fundamental mispricing of (negative) tail risks in the market that has been around in various guises for so long. Back in the day it was the “SA risks becoming Zimbabwe” view.

This is not about disagreeing with a range of views or some honest disagreements over probabilities or scenario outcomes. It’s about something that seems quite deeply buried in market institutional structures, which is why the Treasury’s efforts to manage the curve flatter — it will be a long, slow slog — have been wobbled off course from time to time by political events.

It’s also something deeply psychological. People in markets globally talk in hushed tones about the extreme volatility of the rand and the bond markets. This is almost mystical but when you look at the reality and data, especially through and after Covid, this mysticism doesn’t quite stack up.

So this is the battle ahead for the GNU, for the Treasury as we think through the medium-term budget policy statements, for the Reserve Bank and for SA’s markets.

• Peter Attard Montalto leads on political economy, markets and the just energy transition at Krutham, a SA research-led consulting company.