Goldman Recommends South African Options on Election ‘Surprise’

By Adam Haigh

Jan. 9 (Bloomberg) -- Investors should buy stock options on South African shares before the country’s elections to take advantage of one of the potential “top surprises” of the year, Goldman Sachs Group Inc. said.

Implied volatility for 12-month options on the FTSE/JSE Top40 Index is “inexpensive” because the market hasn’t taken into account the potential risk surrounding the election, London- based Goldman Sachs equity-derivatives analysts led by Jason Cuttler wrote in a note to clients dated yesterday.

“Policies resulting form South African elections and political transitions could prove to be one of the ‘top surprises’ of 2009,” especially if the leader of the ruling African National Congress, the likely winner, turns out to astonish observers in the same way that Brazilian President Luiz Inacio Lula da Silva did, according to Goldman.

After Lula came to office in 2003 he paid debts owed to the International Monetary Fund earlier than expected and succeeded in taming inflation and trimming the budget gap in his first term.

South Africa will hold elections by the middle of the year on a date that has yet to be announced by the Independent Electoral Commission. Jacob Zuma ousted Thabo Mbeki as ANC leader in December and is the party’s candidate to become South African president.

By August, the government should have made key appointments in the finance ministry and central bank. Options on the equity index expiring in December 2009 will capture “post-election catalysts,” Goldman wrote.

The country’s FTSE/JSE Top40 index dropped 26 percent last year, less than the 54 percent decline for the MSCI Emerging Markets Index.

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To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.