TARIFFS, GNU AND OTHER INVESTMENT DISRUPTERS

Why this is not the time to divest from growth portfolios.

Ever so often, investors are thrown curveballs that give them the jitters. No one likes to see their investment values drop, and when they reduce in value overnight and the market is filled with uncertainties, everybody wrestles with the decision whether to down-risk their portfolios or not.

Let’s try to unbundle what’s currently going on and hopefully provide some guidance on what to do or, more importantly, what not to do.

Market disruptions are perfectly normal

First, let me state that market disruptions are perfectly normal. Approximately every five years, something happens that causes markets to retract. Some disruptions are predictable, while others catch you off guard with a punch from the dark. COVID-19 was an unpredictable disruptor. High-priced US tech stocks and the election of US President Donald Trump are known factors.

During the lead-up to the US election, Trump’s message was clear – the introduction of tariffs would be the order of the day, just as he imposed them during his previous term in office. The extent of the tariffs is more extreme and widespread than expected, but they were always intended to be part of his administration.

It was also anticipated that retaliations would be very likely and that the US-Chinese trade war would escalate. What is surprising is his focus on South Africa, and one cannot help but think that Trump’s newfound best friend, Elon Musk, has something to do with it.

Whether you love him or hate him, Trump is a disruptor in his own right. His drive towards Americanism may lead to some unintended consequences that were neither considered nor expected. 

For once, it seems the Eurozone is reuniting and discussing the funding of the Russian-Ukrainian war (excluding the US) among themselves, as well as strategies to counter US tariffs. The UK has joined the talks, and it appears Canada may join the fray.

At this point, it feels like the Commonwealth stands against the US, creating an interesting dynamic. In fact, it seems the US is positioned against the rest of the world.

What does this mean for the parties involved? 

Trump and most of his supporters believe that, in the medium to long term, this will benefit the US. However, many analysts, including some based in the US, are not so optimistic. Let’s unpack some of the major potential consequences; I refer to them as potential because we just can’t know with certainty.

I am going to start with the big heavyweights. The US and China are by far the most significant economies in the world, both regarding production and consumption. What they do matters to the rest of the world.

After the recent quid-pro-quo tariffs that the two giants imposed on each other, it now costs each country 54% more to import certain goods from the other. China has also implemented a total ban on the export of all critical materials to the US. Analysts predict that an iPhone currently priced at $800 (about R15 500) will cost $1 100 (R21 300) going forward. Many other items will similarly be affected in both countries and globally. What is the implication here? Inflation.

Inflation is the primary factor influencing interest rate movements. If inflation becomes significant, there may be a slowdown in interest rate cuts in the US, which will create a ripple effect across the globe. Another risk facing the US is the strong possibility of stagflation.

Stagflation occurs when consumer spending contracts while prices rise, and in the short term, this seems to be the most likely outcome for the US.

Even if the US manages to “internalise” production, establishing production lines will take time, and it remains questionable whether the US can manufacture goods at the same cost as Mexico, China, and other countries from which it currently imports goods and components.

Avoiding inflation and/or stagflation will be a challenge. This also suggests that unemployment may rise in the US, with effects that could extend beyond its borders. Recently, we have observed a decline in bond yields in the US, indicating that bond capital values have increased as investors seek safety amid concerns that interest rates may be more persistent than anticipated.

On the flip side, since Trump was elected, China, Germany, and other European countries have thrived. In light of the indications that the US will no longer support Ukraine, European nations have increased their defence budgets. The UK has raised its planned defence spending from 3% of GDP to 5% of GDP, prompting defence industry stocks to rally. This occurs while costly US tech companies are nosediving. 

However, the latest announcement of broad-based tariffs has sent most markets into a downward trend.

In South Africa, this move has been particularly aggressive over the past week following the rand’s depreciation against the USD. The South African motor industry is likely to be the hardest hit by the tariffs, but hopefully, we can emulate China and, with foresight, find alternative trading partners.

In typical Trump fashion, he maintained a zero-tariff policy on PGM (platinum group metals) commodities, upholding it solely because it favours the US. Perhaps our leaders can use this as a bargaining tool to negotiate lower tariffs on other items, including motor vehicles. This situation also makes PGM miners very intriguing. I look forward to upcoming conferences to hear the opinions of various analysts and fund managers on this matter.

Let’s also hope that our leaders handle the tariff issue with discretion and strategy. Criticising and insulting the US can only result in negative consequences for South Africa.

The general worldwide sentiment is that the US can no longer be viewed as a reliable ally regarding defence and the economy. We do not know how this will unfold. However, we learned from Trump’s previous term that his next strategy is unpredictable. In the past, he has retreated from aggressive tariffs and has reduced them. He employs strong tactics (some refer to them as bullying tactics) to achieve his goals. He calls it negotiating. Call it what you wish; we are stuck with them and remain uncertain about where this is heading.

Opportunities arise in uncertainty

The positive aspect is that amid all the adversity and market corrections, opportunities arise. We depend on the expertise of the fund managers we work with to identify the global sectors and assets that possess defensive qualities and have the best chance to thrive amid the turmoil. This strategy has benefited us in the past, and we believe it will serve us well once again. After all, this is not unfamiliar territory for us.

Disruptions are part of the game. All global markets have recovered after the disruptions over the past century, and this time will be no different.

This is not the time to divest from growth portfolios. It is essential to stay calm and remind yourself of your long-term investment goals. Sitting in cash is not the solution. The risk of missing the recovery or the growth in value of different sectors is too great to take the chance. Investing is a marathon, not a sprint. Consider this as an uphill stretch within your marathon. It’s time to ease your breathing and maintain your rhythm. 

In the same vein, our local GNU and other political challenges should not deter your investment strategy. As South Africans, we are accustomed to adversity in our political environment. The GNU remains a South African experiment, and we can expect many more challenges and threats that may derail it in the future.

Regardless of whether the GNU in its current form survives or not, the ruling party knows that the line has been drawn and that voters expressed their disappointment in its performance during the last polls.

We have entered a new regime in South African politics, and let’s hope that SA voters continue to hold political parties accountable. The budget has still not been approved and implemented; only the framework around it has been approved in principle. There is still room for change, but politics is politics. 

As I have said in the past, focus on what you can control and ignore what you can’t. We cannot control Trump’s antics or SA political antics, but we can control how we act and react. Be mindful of the long-term implications of your actions.

The easiest decision to make is when to exit the market. The most challenging decision is when to re-enter the market. Generally, this is known as market timing, a strategy that often fails.

Stay your course and think before you act.