Jeremy Gardiner discusses unpredictable US/China trade war tensions, “sugary growth” and its impact on South Africa and emerging markets.
Lindsay Williams: I received a piece of work a couple of days ago which started as follows; it says this: “Rising US interest rates were always going to lead to a rising US dollar and that combination was always going to rattle emerging markets, including South Africa. To a greater or lesser degree, these eventualities can be predicted and markets like predictability. What is more difficult to predict (the article goes on) and therefore currently exaggerating market fears, is the US President’s strategy in his trade war with China.”
On the telephone now is the author of that piece. It is Marketing Director of Investec Asset Management in Cape Town and that is Jeremy Gardiner. Jeremy, this has the potential I think to get out of hand or it could be nipped in the bud and Mr Trump and President Xi both look good. What do you think?
Jeremy Gardiner: Completely and that I think is the most unpredictable thing of this, is the predictability of Trump. The reason that investors got a fright and ran away is because if this trade war goes right to the end, i.e. he puts his 25% or 30% tariff on every product that China sends to America, then you could see it leading to even a global recession and that is what turned a risk-on environment into a risk-off environment and they just ran away from emerging markets.
Personally, I can’t help thinking that he is not going to go that far, I mean to the end, simply because he has got re-election in 2 years’ time and he needs a stable, strong US economy and, by default, therefore global economy. If he drives the global economy off a cliff, the US economy is going to be struggling in two years’ time when he is trying to be re-elected. So we have just got to hope that he calms down a bit, that at some stage he does a deal with the Chinese.
There is a G20 meeting in Buenos Aires at the beginning of December, where apparently the Chinese are coming with a raft of new proposals of stuff that they are going to buy from the Americans, including potentially buying all their oil from America rather than from Iran and, hopefully, that pleases Trump.
Lindsay Williams: Yes, it would definitely please Trump, I mean from two respects, his nationalism, as he recently said in a speech, would be brought to the fore by the fact that US oil is being bought and his hatred for Iran would also be satisfied because of the latter point that you just made, but there is one thing that the Chinese have been buying for many, many years from the United of States of America and that is America’s debt and, if this thing did get out of hand, which you seem to think is unlikely but if it did, then, of course, they do hold the purse strings.
Jeremy Gardiner: Well, exactly. That is why you would think that he has to treat them with a bit of respect because they do hold his debt and they could choose to switch that. They could choose to start selling that. So there are a variety of things that they could do but I just can’t help feeling that they are going to come to some sort of deal and, if that happens and the fears of a trade war start to dissipate, the other thing chasing emerging market investors away was the strong dollar. According to most analysts, the dollar has more or less peaked. Now the other thing was rising interest rates in the States. It looks like those are factored into the price as well now.
So actually, if we can just get the tariff war sorted, you should start seeing investors returning to economic fundamentals, which means that they should start coming back to emerging markets and when they do, despite what South Africans will tell you, South Africa is looking like one of the more attractive emerging markets.
Lindsay Williams: Yes, indeed. In fact, that was a comment that was made by the former CEO of Investec when I spoke to him a few days ago, Stephen Koseff. He said that he thought that South Africa was probably the pick of the bunch when it came to emerging markets. The other thing he pointed out to me was that – he talks about grandchildren. He said that when his grandchildren have a sugary substance at round about 6 o’clock, they go mad and then fall on their heads at about 11 o’clock and he thought that that might happen to the US economy because of the tax effect, the tax cuts effects, etc., and he was worried a little bit about that.
Do you worry about that? I mean we can talk about interest rates rising and the market factoring that in, we can talk about the trade wars dissipating and disappearing into the horizon but what about the sugar rush effect?
Jeremy Gardiner: Look, the tax cuts have certainly been what have made the dollar strong and the US economy strong up until now. The interesting thing is that the effects of the tariff war and we are going to have a trade war – I mean he has already put some tariffs in, 10% on a lot of products, but the effects of the tariff war are going to dilute or dissolve the benefits from the tax cuts. So you are not going to get rampant sugary growth (shall we call it) coming from the tax but also now, after the midterms this week, it is going to much harder for him to push through the tax cuts that he wanted to.
In fact, it is going to be harder for him to push through most things he would like to and that, as you saw with the rand this week, is good for emerging markets. The Democrats far more believe in globalisation than he does and so a lot of his “make America great” at the expense of everyone else, which is generally us and emerging markets, will be diluted and voted against.
Lindsay Williams: Let’s look at South Africa now in the markets because if I – I am scribbling all these things that you are pointing out on a piece of paper in front of me and it says here: “interest rates in US factored in”. Corporate earnings have been good and we have seen that. There has been a raft of earnings this week and they are in line or slightly better than expected in general.
Let’s say the trade wars are sorted out towards the end of the year, starting in Buenos Aires, and then, if we combine that with the market embracing Cyril Ramaphosa’s efforts of big investment, which, hopefully, will trickle down to small and medium enterprises in the future, we could be set fair for quite a rally at some stage.
Jeremy Gardiner: Well, absolutely. South Africans got depressed this year. We started off so well. We were so happy for the first three or four months of the year and then suddenly came the tariff war, the rand collapsed, food prices went up, fuel prices went up and everybody – business was tough and people got miserable.
Those things should probably sort themselves out going forward and then the other problem was that people expected Cyril Ramaphosa to be able to fix this country in six months and I think that was naïve. A lot of damage has been done to this country and we are heading in the right direction but it is going to take a while to fix, but the good news is that week-by-week he is making more progress and I think, as people start to see that, then suddenly you are going to start seeing people feeling a lot better.
When they feel that the forces of good are winning, they will feel better and, as I say, we just have to wait for that to happen because the other thing people have to understand is that the December victory was in Cyril Ramaphosa’s favour but it was a compromised victory leaning towards him rather than an outright victory. We have got to get through elections next year so that he can make sure that everybody that is on his side is working with him. At the moment, there’s people within his top 40, within his cabinet, even within his top 6, that are actively working against him and that makes it very difficult to come up with proper policy and decisions that investors will find welcoming.
Lindsay Williams: Given all this, your next paragraph or the paragraph that I am looking at right now says: “So what should investors be doing?” And the first sentence is very simple and it says, very simply, nothing. We do nothing. What do you mean by that?
Jeremy Gardiner: I am not talking about us necessarily but I am just saying, for investors out there with their portfolio, you can’t keep saying right, well now I am nervous, I am going to get out of markets and then I will get back in when they start going up again. You just have to make sure that your portfolio is positioned according to your risk profile where, if you don’t need money for 10 years, you can take more risk, higher equities, and you just sit through whatever markets throw at you. They are going to be volatile, they are going to be up and down but no point trying to get onto a side, get back in because you will never get that right. You will just wind up losing money.
Lindsay Williams: Are you as optimistic 11 months into Cyril Ramaphosa’s tenure as President of the Republic of South Africa? Are you as optimistic 11 months later as you were when he first got the job?
Jeremy Gardiner: Absolutely. I think it has been very hard for people to actually – I think one of the state capture commissioners highlighted just how much damage has been done but I think it is good for us to know and, as I said, while some of our state-owned enterprises are going to take years to fix, at least we have halted the rot. We have put in proper management. We are moving in the right direction. I think we have just got to give it time. I suspect that 2019 on a variety of levels will feel a lot better than 2018.
Lindsay Williams: Jeremy, thanks very much for your insight. Jeremy Gardiner is a Director of Investec Asset Management in Cape Town.