Were fears overblown?

Investors have enjoyed strong returns from markets this year. Were initial fears about the lack of impetus for structural reform in South Africa and the risks posed by President Trump’s trade policies exaggerated? Or has the market become too complacent? 

Financial markets have shrugged off a non-cohesive Government of National Unity (GNU) and the threat of Trump’s unconventional policies. The South African ten-year bond yield (the price that the South African government pays on the debt it issues) has rallied this year despite a deteriorating local economic growth outlook and three attempts at a February budget. Meanwhile, a global economic hard landing is no longer widely expected, even though Trump has recently unilaterally implemented substantial manufacturing tariffs on large parts of the global economy.

The big takeaway seems to be that it could have been worse. At least South Africa passed a budget and Trump (with some notable exceptions) has toned down the scale of the tariffs. 

It is one thing to be relieved that the worst outcome may be avoided but quite another to believe we are heading in the right direction. In the short term, the South African economy remains vulnerable to higher global tariffs and the impasse between the two largest parties in the GNU is not a solid foundation for an economic reset. 

More fundamentally, market belief in the prospect of genuine economic reform in South Africa might require the ANC to no longer be the dominant party in the GNU, while opposition control of at least one part of the US government might be necessary for a break on Trump’s seemingly unfettered power. Neither of these might happen anytime soon, although Democratic control of the US House of Representatives is at least possible in next year’s mid-terms. 

The market is reassured that it does not need to price in the highly adverse tail risks of either a collapse of the GNU or the global financial trading system. The assumption is that the DA and the ANC will remain in the GNU no matter how many “red lines” are crossed, and likewise, Trump will dial back his unconventional policies if they inflict too much self-harm – the so-called Trump-Always-Chickens-Out (TACO) trade.

Meanwhile, Trump is testing how far he can exert control over other US institutions including the US Federal Reserve (Fed), which is still expected to cut interest rates later this month, without eroding confidence in the independence of US institutions. This is a dangerous game with potentially very wide-ranging outcomes. 

Of course, this does not mean that investors will not be able to make money in this environment or that certain companies or strategies will not do well. This year, South African listed gold miners have been major beneficiaries of the weakening US dollar (and appreciating gold price), while, despite the tariff shenanigans, the “Mag-seven” have reasserted their dominance and even beaten lofty earnings expectations. 

At some point, the depressed valuations of certain South African listed equities tied to the domestic economy will become so compelling that they could perform well despite the challenging economic environment. And superbly well if the cycle turns. 

The International Monetary Fund recently upgraded its economic growth forecasts for both the US and China (though not South Africa), given that the trade war is proving less damaging than initially feared. Even though higher inflation is a concern, the Fed is widely expected to ease interest rates as US employment growth slows. 

So, what to make of all this? With investing, one should always be prepared for the unexpected. While it is important never to understate the possibility of adverse outcomes, experience shows that markets more often surprise to the upside than collapse under the weight of fear. Recent resilience is welcome but it does not remove the risks that remain, from US policy uncertainty to South Africa’s structural challenges. The more effective course is not prediction but discipline: building portfolios around quality, diversification and sound risk management. That balance, resilient enough to withstand shocks, yet positioned to capture upside when it comes, is ultimately what defines long-term investment success.

By David Crosoer, Chief Investments Officer