TVC Economic Review: Trade Wars and South Africa’s New Dawn

As South Africans we tend to shift between extreme optimism and extreme pessimism when we talk about our country’s economic state (more of the latter in recent times). Some issues effect the fundamentals of our economy, while others trend for a few weeks and tend to fade away after a while. For this reason, we aim to focus on fundamental issues when providing our independent economic review.

In this economic review, we discuss the events of the second quarter of 2019. We explain what happened, what experts are saying and what you can do.

What Happened?

Global Economy

(photo credit: Getty)

US-China Trade War

On 6 July 2019, the US-China trade war marked its first year anniversary.
It has been a hostile second quarter:

10 May 2019:

After trade negotiations broke down, the US increased tariffs on US$200 billion worth of Chinese goods from 10 per cent to 25 per cent.
China responded by announcing that it will increase tariffs on US$60 billion worth of US goods from June 1.

15 May 2019:

The US Department of Commerce announced the addition of Huawei to its “entity list’, which effectively bans US companies from selling to the Chinese telecommunications company without approval.

31 May 2019:

China announced that it will establish its own unreliable entities list.

1 June 2019:

China increased tariffs on US$60 billion worth of products.

29 June 2019:

President Xi Jinping and Donald Trump agreed a trade war truce at the G20 summit in Japan, delaying the imposition of new US tariffs of up to 25 per cent on US$300 billion worth of Chinese goods.
Trump also suggested some of the restrictions placed on US companies selling products to Huawei will be lifted.

Image result for brexit

Brexit

The 23rd of June marked the 3 year anniversary since the British people voted to leave the European Union (EU). Events in the second quarter of 2019 has increase the tension in what feels like Britain’s less favourite version of ‘deal or no deal’.

24 May 2019:

Theresa May has announced her resignation as Prime Minister on 7th June. She will stay on for as long as is needed for the Conservative Party to find a replacement. May resigned because she has been unable to find a solution to the Brexit crisis.

19 July 2019:

The process to elect the next leader of the Conservative Party, and therefore the next Prime Minister, is almost over, and the winner is expected to be Boris Johnson. During his election campaign, Boris appealed to the right-wing of the Conservative Party by promising to deliver Brexit on 31st October with or without a deal.

24 July 2019:

Boris Johnson is now Prime Minister of the UK, and has started by enthusiastically repeating his promise to take the UK out of the European Union by 31st October. To show his determination, he has packed his Cabinet (his Administration) with right-wing Eurosceptics, in spite of his pledge to run a government that represents all aspects of modern Britain.

Local Economy

Lions Head Panorama (Justin Els)

The Good

As the country hosts business and world leaders at the 2019 World Economic Forum on Africa in Cape Town, the positive news on the country’s economy growing by 3.1% has been well received, as released by Statistics SA on Tuesday 03 September 2019.
As part of the journey to renewal and growth, government remains committed to partnerships for growth with business, labour and civil society in reinstating confidence and addressing the structural constraints to economic growth.

The main drivers of growth were:

SA Industry Performance Q2 2019
Source: http://www.statssa.gov.za

 

The data showed mining output grew by 14.4% in the second quarter, after declining by 10.8% previously. Manufacturing output rose 2.1%, rebounding after declining 8.8% in the first quarter. This is largely due to less load shedding than experienced in the first quarter.

Related image

The Bad

Moody’s, the last of the three big international ratings agencies to keep South African debt at investment grade, said in July that government’s proposal to provide additional financial support to Eskom was “credit negative”.
The government said it would give Eskom R59 billion ($3.87 billion) of additional financial support over the next two years, on top of an already-promised bailout of R230 billion spread over the next decade.

Economic performance

  • South African Equity Market: 3,9%
  • Global Equity: 1,7%
  • South African Listed Property: 4,5%
  • South African Bond Market: 3,7%
  • Cash: 1,8%

Rand Exchange Rate:

+3.9% to the £
– 0,3% to the €
+ 2,3% to the $

What Are The Experts Saying?

Global Economic Review

Image result for wall street

USA

In light of the trade war, sentiment across the globe remains depressed.
US Consumer confidence remain high.
The yield curve in the US has inverted.
This means that investors receive a higher return on short term bonds than they would on longer term bonds.

As recession signals go, this so-called inversion in the yield curve has a solid track record as a predictor of recessions. But it can take as long as two years for a recession to follow a yield curve inversion.
On average 311 days after yield curve inversion, a recession occurs.
Experts do not expect a recession within the next 12 months.

The Federal Reserve Bank (FED) is likely to cut interest rates to stimulate a slowing US GDP.
If the FED cuts, there might be room for the South African Reserve Bank (SARB) to cut local interest rates further.

If there is a trade deal between US and China, the Dollar will be the biggest loser.

Image result for britain

Brexit

If the UK fails to get a Brexit deal with the EU, it will likely trade with it under World Trade Organisation rules. This could threaten financial stability in the Britain.

The outcome of the heated debates currently under way in Europe could have a knock-on effect on South Africa. Many South African companies have their European headquarters in the UK. They use these as a base to serve the rest of Europe. Depending on which way the Brexit needle swings these companies may be forced to set up a base somewhere else to continue to do business in Europe.

The EU is South Africa’s most significant trading partner, with the UK being a big part of this.
If the UK were to leave the EU, trade agreements would have to be renegotiated with no guarantee of an equally favourable outcome

Image result for cyril ramaphosa speech
Local Economic Review

Local Equity

The first half of 2019 indicated that the All Share Index is up by 12,2%.
Local markets were driven by Resources.
SA Momentum Style Funds performed best while SA Quality Style Stocks performed second best.
SA Equities are relatively cheap, but due to low business and consumer confidence, experts are neutral on this asset class.

Local Property

This asset class is trading at 15-20% discount.
However, the uncertainty in the economy means that it is unlikely that we’ll see a bounce back within the next 24 months.
If you have a long term view on your investment, it might be a good idea to invest while this asset class is trading at a discount.

Emerging Markets

The US-China trade war increases volatility in emerging markets, which make investors feel uneasy.
With that being said, emerging markets are cheap and could provide great returns if/when the US-China trade war is resolved.

Financial Plan

What can you do?

Assets Managers traditionally defined risk as the volatility in the market.
The reality is that risk is unique to each investor.

There is no “one-size- fits-all” solution when it comes to investing.
Your investment solution will be determined by the following:

  • Life Stage
  • Investment Goals
  • Risk attitude
  • Tax Bracket
  • Existing portfolio
  • Country of residence

For the most applicable and appropriate solution, consult an Independent Financial Adviser.

Get in touch with TVC Wealth & Health Managers to arrange a 20minute introduction meeting.

 

References:

https://www.scmp.com/comment/opinion/article/3025488/how-much-economic-pain-can-china-tolerate-trade-war-donald-trump

https://about-britain.com/institutions/brexit-process-timeline.htm

https://www.moneyweb.co.za/news/south-africa/south-africas-second-quarter-economic-growth-beats-expectations/

https://www.brandsouthafrica.com/investments-immigration/business/investing/brand-south-africa-recognises-the-countrys-3-1-economic-growth-for-the-second-quarter?amp

https://www.dailymaverick.co.za/article/2019-08-29-sa-has-likely-dodged-a-recession-which-is-about-the-best-the-economy-can-do-at-the-moment/amp/

https://www.reuters.com/article/us-usa-economy-watchlist-graphic/predicting-the-next-u-s-recession-idUSKCN1V31JE

http://www.statssa.gov.za

 

See our Economic Review for Q1 2019 here.

 

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