Asset manager Old Mutual Investment Group (OMIG) says the dollar strength after the return of Donald Trump to the White House in a landslide victory on Wednesday is a cause for concern for emerging markets, including SA.
“The dollar has been the one big beneficiary of this win, which is worrying for emerging markets, particularly if it means that rates can’t be cut as much as previously thought. Dollar strength is therefore putting pressure on emerging markets, as well as currency and fixed income markets,” portfolio manager at OMIG Jason Swartz said.
Swartz added that SA could face capital outflows as investors gravitate towards higher yields in the US, leading to a weaker rand and increased borrowing costs.
“However, I wouldn’t say it’s going to be all-fall down for emerging markets, many of whom are still able to use domestic growth drivers to stimulate growth. Fortunately for SA, some of our cyclical and secular growth drivers involve structural reforms that can boost private sector participation and remove supply-side bottlenecks.
“In fact, SA could be seen as a haven in an emerging market universe that faces pressure from many sides. In my view, SA certainly has the scope to drive this growth domestically, but may be limited by the lack of a commodity demand cycle should a Trump presidency and strong dollar put pressure on commodity prices.”
The rand on Thursday pared back losses from Wednesday when it had a knee-jerk reaction on the US elections.
It is expected that Trump’s presidency will provide a boost to US equities, but hurt emerging markets.
Peter Takaendesa, head of equities at Mergence Investment Managers, said external environment was unlikely to be of much help to SA’s economic recovery if most of Trump’s policies were implemented, so the country would have to rely more on self-help economic reforms to power its economic recovery.
“It will be difficult to navigate without the external tailwinds, but it is possible if key structural issues are resolved. Political stability and progress on reforms will be key in rebuilding consumer and business confidence,” he said.
“You also want this confidence to translate into actual capital expenditure and employment creation to sustain the economic recovery back to over 2% real GDP growth.
“A combination of these factors and a Fed that is likely to continue to trim interest rates could work together to stabilise the value of the rand. It is also quite possible that such developments could result in ratings agencies and related capital flows turning in SA’s favour.”
Trump’s presidency comes as SA prepares to take over the presidency of the G20 from next month, which culminates in the country hosting the bloc’s summit for the first time.
Thys Louw, emerging market fixed income portfolio manager at SA’s largest asset manager Ninety One, said the focus would now shift to policy priorities under a second Trump administration.
“The initial market reaction reveals the expected policy mix to comprise more expansionary US fiscal policy, reduced government regulation, a change in geopolitical stance, and increasingly aggressive trade policy towards global manufacturing centres such as Europe and Asia,” Louw said.
“This has reflected in the market trading with a reflationary/risk-on tone in US assets (higher treasury yields, stronger equity futures and stronger dollar), while currencies such as the euro and Mexican peso have been the main underperformers as they are likely to find themselves in the crosshairs of trade policy.
“Looking ahead, several key events over the next few days could help shape the short-term outlook for emerging markets in the face of trade and tariff uncertainty, namely the Chinese National People’s Congress meeting, which will give guidance on the size of Chinese fiscal support; the November US Federal Reserve meeting; and a 30-year US treasury auction, which will be important in providing an anchor for longer dated treasury rates.”
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