As we enter spring there are a couple of things to look forward to: warmer weather, seasonal flowers, spring produce, scenic views, longer daylight hours, increased outdoor activities, refreshing rain showers and an overall boost in mental health, creativity and wellness.
As a jazz enthusiast I am particularly looking forward to the plethora of jazz exhibitions scheduled to take place locally, featuring a range of top American and SA artists. Looking at this mix one is tempted to overlook the ever-increasing geopolitical tensions between the two countries and across the globe. Yet these continue to plague us even as we enter spring.
International trade has become extremely volatile, with policy uncertainty stemming from the US persisting. Inventory management has proved to be a challenge, with companies front-loading in one quarter and stuck with inventory in another. This was clear in the US economic growth print disappointing in the first quarter and positively surprising in the second quarter, driven by huge swings in net exports.
A positive from a US perspective has been the estimated additional $30bn a month in revenue from the tariffs and a favourable deal struck with the EU. But these are coming at a cost. Though positive on a year-to-date basis, US markets have been exceptionally volatile, with drawdowns of about 20% earlier in the year, the dollar has lost ground against most major global currencies, and much of the additional revenue is likely to be spent supporting US industries that have been negatively affected by the tariffs, making this a zero-sum game at best.
Furthermore, notwithstanding that the US economy is still expected to grow this year, the probability of a recession has doubled since the start of the year, and the expected growth rate has reduced by more than 50 basis points. Even worse for the US are the inflationary pressures the tariffs are expected to induce, putting the Federal Reserve at loggerheads with President Donald Trump’s desire for lower interest rates.
Of its more than $30-trillion in debt, the US has to refinance more than half in the next three years, which will put even more pressure on its fiscus if interest rates stay where they are. All of this while continuing to run deficits across most of its major trading partner economies. The premise of the tariffs was to close its twin deficits on the fiscal and current account, contain debt and support the US economy — a mission that is proving challenging on all fronts.
Meanwhile, we have been stuck in the US crosshairs, for a range of reasons that have been well publicised. All while we continue to battle real problems at home stemming from anaemic levels of economic growth, high levels of inequality and poverty, infrastructure challenges on the energy, water and transport fronts, high levels of unemployment and low levels of confidence.
However, we remain confident in the power of resolution and new beginnings. Amid all of this turmoil the rand has been resilient, particularly against the dollar. Bond yields have compressed, delivering double-digit returns for investors and reducing the cost of servicing debt for government; the duration spread has narrowed, indicating better economic prospects ahead; and fiscal consolidation remains largely on track.
Local equities have reached record highs, with the all share index breaching the 100,000-point mark for the first time. This has been led by gold and platinum, as well as some of the rand hedge stocks. Meanwhile, SA-facing counters remain attractively valued, with improving fundamentals and sustainable long-term growth prospects ahead.
Spring is indeed in the air.
• Smith is chief investment officer at Absa Investments.
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