US tariffs and reaction from global markets

In a significant escalation of trade tensions, President Trump’s administration recently introduced a two-part reciprocal tariff plan. This includes a baseline 10% tariff on all imports from countries except Canada and Mexico and an additional tariff targeting major trading partners. The policy, which will take effect on 9 April 2025, is designed to address trade imbalances, with countries like China and other Asian trading partners being hit particularly hard due to their trade surpluses and cheaper production. The weighted average tariff rate resulting from this policy is 18.3% with exemptions on about a third of total imports. The effective impact is expected to be closer to a 12.6% increase in tariffs.

The immediate market reaction has been dramatic. US equities, already under pressure from the threat of escalating trade wars, saw a sharp drop, with the S&P 500 falling by 9.05%. This marks one of the largest two-day drops since the Great Depression. The impact of this tariff announcement was not isolated to US markets; global equities mirrored the losses, with the STOXX 600 and FTSE 100 down by 8.36% and 6.94%, respectively. In Asia, the Hang Seng index lost 2.46%, as tensions with China intensified, with Beijing retaliating by imposing a hefty 34% reciprocal tariff on US goods.

The prospect of a global recession has sharply increased, with markets adjusting their expectations. The probability of a US recession is now being priced in at the highest levels since 2020. This fear has weighed heavily on global risk assets, including equities and commodities. The drop in commodity prices, including oil, signals concern over a slowdown in demand due to a potential global economic contraction. The Federal Reserve, in response to these developments, is expected to cut rates more aggressively, further fuelling recession fears.

South Africa: Economic strain and political uncertainty

South Africa finds itself grappling with multiple economic challenges. The country received a blow with the imposition of a 30% tariff on its exports to the US, a move that came as a shock, especially when the expectations had been closer to 8%. This tariff increase forms part of the broader US reciprocal tariff plan, which has already hit other trading partners like China. The magnitude of the tariff has raised concerns about its impact on South Africa’s key sectors, especially as it coincides with a broader pullback in global commodity prices.

The South African economy is already facing significant headwinds, with lower commodity prices exacerbating fiscal and economic growth challenges. The uncertainty surrounding global growth, particularly in the wake of the US tariffs, has undermined business confidence, which could further depress South Africa’s economic outlook. The risk to South Africa’s fiscal health is pronounced, as lower commodity prices directly affect revenue from exports, while the currency (ZAR) could face additional pressure due to heightened global risk aversion.

Adding to these economic pressures is the political uncertainty surrounding South Africa’s governance. The formation of the Government of National Unity (GNU) is facing serious challenges. Tensions within the coalition government have escalated, particularly with the proposed VAT increase, which has become a key sticking point. Action SA, a key player in the coalition, has publicly criticised the ANC for failing to honour its commitments regarding tax policy, specifically regarding the reversal of the VAT hike. This has created friction between the ruling parties, raising doubts about the stability of the GNU.

The potential dissolution of the GNU could lead to further political instability, which in turn could undermine investor confidence and exacerbate the economic strain. The ANC’s handling of fiscal policies, including tax changes, will be critical in maintaining political cohesion. However, with parties like the DA reportedly facing pressure from funders to reassess their position within the coalition, the future of the GNU remains highly uncertain.

A global growth slowdown looms

The global economic environment is increasingly uncertain, with trade tensions and tariffs pushing markets to reprice risk. US equity markets are pricing in a higher probability of a recession, and this has cascaded into global markets, where the fear of an economic slowdown is tangible. Commodities, including oil, have suffered as investors anticipate reduced demand, particularly from key emerging markets like China.

For South Africa, the economic outlook is bleak. The increased tariff burden from the US, coupled with the risk of a political crisis within the GNU, places additional stress on the country’s already fragile economic situation. Commodity price declines, potential declines in export revenues, and a weakened currency are all factors that could exacerbate South Africa’s fiscal difficulties. With the uncertain political environment further clouding the country’s prospects, South Africa faces a challenging road ahead.

Sticking to our process amid global and local uncertainty

Despite the challenging market environment and economic uncertainties both globally and locally, we remain committed to our tried-and-tested investment process. This strategy, which has served us well in past crises like the COVID-19 pandemic, continues to guide us through turbulent times. Our focus remains on investing in great businesses at fair valuations – businesses with strong fundamentals, resilient cash flows, and solid growth potential.

We believe that despite the short-term market volatility, these businesses will outperform over the long term, especially once the broader economic uncertainties settle. Our allocation strategy is designed to take advantage of asset classes with a very high probability of strong performance in the next couple of years, particularly in sectors poised to benefit as global markets recover and stabilise.

In summary, while we recognise the risks presented by ongoing trade tensions, tariffs, and political instability in South Africa, we maintain confidence in our disciplined approach to investing. The opportunities available to us in undervalued businesses and high-potential asset classes remain compelling, and we are positioned to benefit from these opportunities in the years ahead.