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Taking Stock

Oops, Trump did it again!

22 May 2019
Author: Jeremy Gardiner

2018 started so well. We had been spared an additional eight years of another Zuma presidency and we had a great new leader in Cyril Ramaphosa. Finally, we could start fixing the country.

Then suddenly in April, ‘Ramaphoria’ went out the window, our currency dived, the petrol price rocketed, growth slowed into recession and the stock market got hammered. South Africans blamed our politics and corruption, when in fact, the same scenario was playing itself out across most emerging markets worldwide. The reason, very simply, was that Trump had declared economic war on the Chinese. Globally, analysts seemingly concluded that tariffs of 25% on all Chinese exports to America were likely to significantly dent the Chinese, and therefore all emerging market growth, and they dumped emerging market assets. In May last year, foreign investors sold more South African bonds than ever before in one month.

2019 feels eerily similar. Finally, awoken from their five-year slumber, equity markets have been spurred on by a seemingly imminent end to the tariff war. Despite Eskom and corruption, a bumper first quarter was followed by an equally exciting beginning to the second.

Then came elections, but markets held their ground as the noise levels rose. And there were legitimate fears – the ANC could easily have been punished hard for the last nine years, in which case it would have needed alliance partners, which could have seen EFF populism dictating government policy. A poor showing for the ANC could ironically have been blamed on Ramaphosa, leaving him with a weakened mandate, and even possible ejection. In the end we got the perfect result – the people forgave the ANC for the past nine years and voted for the President because they like him, giving him a strong enough mandate to do what now needs to be done. The EFF got less than it could have and won’t be needed as an alliance partner (a kingmaker) this time, meaning that despite its improved showing, the EFF is not in government anywhere.

The big fear pre-elections was that a faction within the ANC was going to remove Ramaphosa as president shortly after the elections. We put this question to the country’s top five political analysts, and almost without exception they said it was highly unlikely, if not impossible. In their view, those rumours had been circulated by opposition parties to stop people voting for the ANC.  So with President Ramaphosa in place, at least until 2022, can we finally start fixing this country, end corruption and create jobs?

What would really help him in this quest are some macro tailwinds in the form of emerging market strength, which had already begun. Whether it continues or not, I’m afraid, lies in the hands of Donald Trump. The good news is, he has an election coming up in 18 months’ time, for which he needs a strong economy and stock market, both of which will be hurt by a tariff war. Although there is speculation that part of the reason he is doing this, is that by increasing risk aversion and depressing asset prices, he will force the Chinese to stimulate more and the US Federal Reserve to drop rates. This would push US stock markets and growth to record highs, just in time for elections.

In addition, the Chinese have hit back with tariffs of their own, targeting products made in Trump-supporting states, which will greatly annoy the soybean farmers, and will hurt at elections. And finally, in two to three months’ time, American consumers will suddenly realise that it’s actually not the Chinese who are paying for the tariffs, but the Americans, with prices for everything from smartphones to televisions, rising by 25%. This will annoy them, but Trump knows this and can’t risk upsetting them before elections. So expect more Chinese stimulus, possibly even a US rate cut, and then ultimately, hopefully, a US-China deal, all of which should be favourable for emerging markets, including South Africa.

Jeremy Gardiner
Jeremy Gardiner

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This document is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management (Pty) Limited is an authorised financial services provider. Issued by Investec Asset Management, May 2019.

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