RICARDO SMITH: Resilient SA economy and markets defy geopolitical tensions on many metrics

The past 12-18 months have seen elevated geopolitical tensions, with trade and economic relations deteriorating. In the traditional risk-off sentiment, flight-to-safety model, the South African rand — being among the most liquid emerging market currencies — would experience aggressive sell-offs, with currency-induced inflation the order of the day.

One would imagine this particularly being the case given that South Africa has found itself directly in the crosshairs of the US president. We can all vividly remember the dimming lights in the White House as a video clip was played and touted as genocide in South Africa.

However, this has not been the case. The largest impact of the geopolitical tensions has been reduced economic growth due to reduced trade. Despite this, the South African economy and markets have proven resilient. We have seen aggressive rand strength, compressing government bond yields, contained inflation, a lower inflation target, removal from the greylist, a credit ratings upgrade and record highs on the JSE.

This indicates that not all crises are the same. The source of the political uncertainty has mostly been the US. Central banks and asset allocators have been allocating away from US assets such as bonds, hence reducing demand for the dollar while increasing allocations to precious metals such as gold, platinum and silver.

One asset class that is difficult to ignore in the US has remained equities. Despite an increasingly crowded large language model sub-sector and stretched valuations in the tech sector, and more broadly the market, demand remains strong. Constant positive revisions in earnings, efficiency and productivity gains, improved margins, growing markets, interconnected value chains and a competitive advantage from years of capital outlay and regulatory support all point toward positive high single to double-digit returns in the long term. In the short term, given stretched valuations, US markets will continue to be sensitive to any policy shifts that appear to threaten the earnings growth trajectory.

From a South African perspective, the evident resilience does not suggest there are no challenges. The largest by far remain unemployment and inequality. Over the past 15-20 years labour-absorbing sectors such as construction and manufacturing have moved largely sideways, with sectors such as agriculture growing from mechanisation and mining remaining excessively volatile as the underlying commodities continue to be cyclical.

Attraction and allocation of capital have also remained a challenge. We have seen some improvements in the efficiency of capital allocation from the government, increasing the allocation to developmental initiatives and less towards the cost of servicing debt.

We have already felt the impact in infrastructure improvements, from steady and reliable electricity supply to improved logistics, allowing us to participate in the precious metal rallies. Some challenges continue to persist regarding water infrastructure and railway capacity.

This has been partly caused by necessity, as the dependency ratio between taxpayers and benefactors is increasingly stretched, with little appetite for further tax hikes and a government of national unity allowing consensus allocations to be reached. It is also driven by opportunity as lower levels of inflation and a lower inflation target have allowed lower increases in government expenditure.

Since the days of Pravin Gordhan, Nhlanhla Nene and the sobering budgets of Tito Mboweni there has always been a long-term desire by the National Treasury to contain debt and consolidate government spending.

However, the effects of these policy reforms take time to filter through to households and businesses. We have already felt the impact in infrastructure improvements, from steady and reliable electricity supply to improved logistics, allowing us to participate in the precious metal rallies. Some challenges continue to persist regarding water infrastructure and railway capacity.

Though the South African equity rallies have been led by gold and platinum mining counters, we should not ignore the performance of the finance, technology, telecommunications and consumer staples sectors — indicating a far broader market performance than the prevailing narrative.

It not only underscores the distinct nature of the current global environment, but it also reinforces the importance of focusing on what is within one’s control to not only manage risk on the downside, but also continue to participate on the upside.

• Smith is chief investment officer at Absa Investments.