Bad news for the rand, interest rates - for now

Garth Theunissen - Donald Trump’s victory in the 2024 US presidential election may have just worsened prospects for the rand, the JSE and the broader South African economy.Still reeling from a Medium-Term Budget reality check, which saw finance minister Enoch Godongwana trim SA’s growth forecasts and flag wider fiscal deficits, local investors now face the fallout from a second Trump presidency on SA. While a "Trump bump" could result in a stronger US economy in the short term, some analysts warn his policies may actually have the opposite effect of what he’s aiming for - making America's economy great again.Trade warThe US President-elect favours more pro-business policies like tax cuts and deregulation of key sectors like energy and finance, but his proclivity for protectionist tariff hikes and cuts to immigration could be inflationary, thereby limiting prospects for deeper rate cuts by the Federal Reserve.Some analysts say that may undermine Trump’s preference for a weaker dollar needed to boost US exports even as his "America First" stance potentially also sparks a trade war with China, which will hurt South Africa."SA remains a small, open economy in the emerging market context, so we are very dependent on imports and exports. Tariffs and trade wars aren’t great for us. That’s going to cause volatility in the market, which typically leads to a stronger dollar, as investors avoid risky assets. That uncertainty is what is playing out with the JSE and the rand," Hannes van den Berg, a portfolio manager at Ninety One, told News24. "A lot of those tariffs will probably be aimed at China, which is the gorilla in emerging markets. SA assets tend to trade in line with what happens in emerging markets."[Trump] wants to see a weaker dollar, but a lot of the policies he wants to implement on immigration, tariffs ... and regulation ... could potentially lead to a stronger dollar in the longer-term," Van den Berg added. "If you start meddling with immigration, it can complicate your labour market and cause labour inflation. Tariffs also aren’t good for inflation."Interest ratesThis means that the US won’t be able to cut interest rates as aggressively, Van den Berg said.US stocks and the dollar surged in the immediate aftermath of Trump’s victory, which saw him win the presidential race for a second time. That hurt the rand, sending it to R17.81/$ even before the final US election results were announced, before it recovered somewhat to trade at R17.71/$ in late afternoon trade on Wednesday. The JSE All-Share index also shed more than 1% amid an emerging market slump across the world, triggered by the dollar rally and fears about an impending global trade war.The longer-term outcomes of Trump’s policies were less clear, but analysts say SA assets would remain sensitive to how events unfold in the US in the wake of the 2024 presidential election result.Spike"In the short term, we will likely see a spike in US economic growth rates, though this might prove temporary. We expect that President Trump’s policies will see the dollar strengthen in the near term - [leading to] a weaker rand - though over time this will likely unwind," said Nolan Wapenaar, co-chief investment officer at Anchor Capital."The US is currently running a 6% budget deficit. We think that there is a real prospect of this increasing or at a minimum persisting for longer leading to increased borrowing by the US government. “This will see the term premium for US bonds increase, meaning that bond yields will be higher in the US. We think that the policy he is most likely to follow will be inflationary for the US leading to higher interest rates in the US and consequently around the globe."Hardline policiesWhile US markets rallied on Wednesday on expectations for tax cuts and a more business-friendly policy environment, analysts cautioned that Trump’s more hardline policies against trade rivals like China could cause volatility, especially in emerging markets.Nevertheless, there was still uncertainty over whether Trump would be able to steamroll through some of his more controversial policies as control of the House of Representatives was still unclear on Wednesday, though his Republican party had won control of the Senate."President Trump seems to have singled out China for the harshest tariffs. If this occurs, it will negatively impact China and all emerging markets as the US becomes more protectionist," said Wapenaar. AGOA"We are not sure at this stage what this means for the AGOA [the African Growth and Opportunity Act] and South Africa’s benefits. There is usually a gap between the campaign promises and what a president really does."Justine Brophy, the CEO of boutique asset management company AnBro, agreed it was still too early to call the political implications of a Trump’s victory, but warned that potential US tariff hikes on China could derail the Asian nation’s economic growth, thereby damping demand for commodity exports from countries like SA."The impact of higher interest rates for longer would play into the debt space in SA as our bond yields would have to remain higher for longer," said Brophy. "This would limit our debt raising ability in SA as the repayment costs would remain high."Diplomatic frictionBianca Botes, a director at Citadel Global, said if SA’s relationships with certain BRICS members, such as Russia and Iran, come under scrutiny from a Trump administration, which had previously taken hardline stances against those countries, it could lead to diplomatic friction or trade limitations that negatively impact investor confidence and weigh on the rand. She also warned of potential changes to AGOA, which currently allows some SA products duty-free access to US markets."If the Trump administration revisits AGOA and restricts SA’s benefits, sectors like agriculture, automotive, and manufacturing could face export disruptions, dampening growth prospects and placing added pressure on the currency," said Botes.PressureJohann Els, chief economist at Old Mutual, said if Trump’s policy choices were implemented "strongly and quickly", it would lead to upward pressure on US inflation and a shallower rate cutting cycle."That would be sometime in the future – late next year or into 2026 – but it will be very dependent on how quickly this plays out," said Els, adding this could cause the dollar to strengthen."The opposite side of that coin is that Trump actually wants a weaker dollar, so there are lots of moving parts in this equation," Els added."The rand has weakened somewhat in anticipation of Trump’s policies. I think current market reactions are kneejerk and might take some time – he’s only starting his presidency in January next year. “I still think there’s going to be a somewhat weaker dollar over the next six months [and that] the rand will strengthen. Not only because of a weaker dollar but also because of stronger SA fundamentals and less SA-specific risk."Impact on the JSEShaun Murison, senior market analyst at IG, warned SA investors that they might need to prepare for increased market volatility and the potential underperformance of sectors vulnerable to trade tensions.Trump's support for fossil fuels could benefit South African coal exports, but might negatively impact prices of metals - including platinum and palladium - used in renewable technologies, Murison added.On Wednesday, metal prices slumped, with Sibanye (-9%), Implats (-7%), Northam (-6%) and Angloplat (-6%) taking the biggest hits.VolatilityMurison expects that the JSE might experience increased volatility due to global trade uncertainties, affecting export-orientated firms and benefitting defensive sectors like consumer staples."Companies like Shoprite Holdings or Tiger Brands, with their focus on essential goods and a strong domestic presence, might be viewed as safer bets during periods of global uncertainty."Given that Trump’s inflationary policies could lead to higher interest rates in the US – and by extension SA too – this could benefit local banking shares, Murison said.Banks usually get a profit boost from higher interest rates. Their massive cash balances earn higher interest, and their profit margins on the interest earned from loans also improve.Trump might encourage US companies to repatriate investments, potentially reducing foreign direct investments to South Africa, Murison added. This could also result in higher costs of capital for South African businesses and the government. - Fin24

Bad news for the rand, interest rates - for now

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