ONE VOTE SHORT OF POWER TO CHANGE S. AFRICA’S CONSTITUTION: INVESTORS ANTSY OVER ANC CLOUT

Many professional U.S. investors are unnerved by this month’s elections in South Africa, where the ruling African National Congress won 66.5% of the vote, giving it pretty much unfettered power.

Under the constitution adopted after the ANC took power in the country’s first all-race elections in 1994, any party that wins at least two-thirds of the seats in the National Assembly will be able to amend the constitution unilaterally. It is this possibility that has global investors most concerned.

While the ANC won 266 seats — one short of the 267 needed to allow it to change the constitution — some investors remain wary. They say it will not be difficult for the party to persuade at least one other member of the National Assembly to support it should it wish to alter the constitution.

Mark Mobius, president of the Templeton Emerging Market Fund, says the voting had “fundamentally altered my investment view of the country” as it gives “too much power to one party, particularly during the transition from (Nelson) Mandela to (Thabo) Mbeki.”

Mr. Mobius is one of the most-respected emerging market investors, and his $40 billion fund is the single largest investor in South Africa’s financial markets. It is heavily weighted towards the country at 8.5%, or $3.4 billion.

“We will adopt a very conservative and cautious approach to further investment,” he says. “We will closely monitor all developments, but believe this would be a very dangerous situation and would increase the country’s investment risk.”

The fund would be unlikely to increase its investments in South Africa and could, in fact, scale back its existing holdings, Mr. Mobius says, adding, “There is always a significant risk in a policy that tries to push one group forward at the expense of others.”

Nervous foreign investors had already started bailing out of South African stocks even before the final election results were released. The latest figures from the Johannesburg Stock Exchange show that in the four trading days immediately prior to June 3, foreign stock investors were net sellers of 186.21 million rand, or $30.3 million.

While the South African markets started to rally early last week, talk of a possible alliance between the ANC and the Inkatha Freedom Party — led by Chief Mangosuthu Buthelezi — which would give the ANC an effective 75% majority in parliament, also had investors worried.

The political upheaval is occurring against the backdrop of a poor outlook for commodity prices, plus a tough economy in which there is 25% to 35% unemployment, depending on whether the figures are supplied by the government or the private sector.

“The current falling commodity prices indicate continued global economic weakness, which is weighing far more on investors’ minds that the outcome of the elections,” says Trevor Greetham, an international strategist for Merrill Lynch & Co. Inc. in London.

Dion Friedland, founder of Magnum Global Investments Ltd., one of the world’s top hedge fund houses, says crime remains the largest deterrent to foreign investment.

“Foreign interest is limited to certain sectors and this will continue whether the ANC wins a two-thirds majority or not. While it would be better for global sentiment towards the country if that didn’t happen, the crime rate is still the major issue,” says Mr. Friedland, whose Dion’s is one of South Africa’s largest retail operations. For example, one in three women in South Africa is raped, police statistics show.

Those who are more bullish include Alex Baez, portfolio manager for emerging market stocks at J.P. Morgan & Co. Inc. in New York. He says Morgan prefers the status quo, but it remains very positive about the outlook for South Africa. His fund is overweighted there by 2 percentage points, compared to the Morgan Stanley Country Index, in which it has a 9% weighting.

“We do not feel that the ANC would take any steps that would damage the hard-won credibility it has established internationally over the past few years,” he says. “We would be surprised if it interfered with the independence of the Reserve Bank. Tito Mboweni, the soon-to-be governor of the bank, and Gill Marcus, a deputy governor, are senior ANC officials.”

“South Africa has made huge strides the past few years towards reintegrating itself as a serious player in the global financial arena,” adds Leigh Wasson, also an emerging markets portfolio manager at Morgan.