Global equity markets have seen erratic trading in recent weeks, and that has shown its face in the South African market too. June saw the All Share Index plunge 5%, only to recover and close the month 2.78% higher. Market sentiment was a rollercoaster ride and that reflected in the rand, which saw substantial daily movement alongside other emerging market currencies.
Credit: Graph Provided by Sharenet Advanced Online Charts
First, some background
China is heavily involved in trade with several countries, and is the largest trading partner of the US. It may appear from the outside that Chinese markets are accessible given the volume of trade it conducts with other nations, but the real picture looks different. China has caps on foreign ownership of Chinese companies, and the rules are set up (rather unfairly) to allow Chinese companies to receive the intellectual property from the minority shareholders in what they call ‘forced technological transfers’. President Trump views this as theft of trade intellectual property, which gives Chinese companies access to trade secrets.
China has caps on foreign ownership of Chinese companies, and the rules are set up rather unfairly.
It is no secret that China benefits from its own protectionist policies, but addressing this issue requires the collective effort of several countries. The US should be sourcing the help of its allies to assist in getting fair trading policies with China. Instead, the US is storming the gate, guns blazing, with its trade tariffs and some of its key trade partners have been caught in the crossfire.
The use of trade tariffs is usually associated with protecting a new industry, while companies within the industry establish themselves to be competitive. President Trump’s method of imposing tariffs is aimed at clawing back lost revenue that resulted from unfair trade with China, and this can be considered unfair trade practices in the eyes of the World Trade Organization (WTO). The WTO is a member-driven organisation, meaning the countries collectively make decisions based on consensus.
If the US alienates itself from its trade partners, then it becomes more difficult to get a vote in their favour, and the US could be at risk of future sanctions.
What has happened so far?
The US placed import tariffs on steel and aluminium, which was aimed at China. Several other countries were also impacted including Canada, the 2nd largest trading partner of the US. That led to a response from Canada to add import tariffs of their own. President Trump is also threatening Europe with import tariffs, citing German carmakers as a potential target. The EU has already indicated its willingness to meet the US with its own trade tariffs.
Start of the trade war
On Friday (06/07/2018) the US officially triggered tariffs on Chinese products, and it was met by import tariffs from China. Russia then joined the party in an almost coordinated fashion by increasing import duties on US goods in response to earlier tariffs on aluminium and steel. The US may respond with more severe trade tariffs, but that is likely to be met with an equivalent response. Hence we have a trade war, with both sides unwilling to relax their stance.
What does it mean for global growth?
There will be an economic impact due to trade tariffs as global trade will be reduced and historically higher trade volume has been a strong driver of global economic growth. JPMorgan conducted a scenario analysis, and expects the negative impact on global GDP to be 0.2% if the US increases import tariffs without retaliation. We are already seeing countries respond with their own tariffs against the US, so the impact should be greater than this. JPMorgan projected a 0.4% impact if countries retaliated to US tariffs. The worst-case scenario is a full-blown trade war across the US, China and Europe, in which case the impact is projected to be 1.4%.
JPMorgan projects a negative impact of 0.4% on global GDP and a worst-case scenario of 1.4%.
Trade war… who are the participants?
How will it impact South Africans?
The South African market and the rand is prone to global factors. Let’s start with the equity market. A global trade war is likely to reduce global trade and demand, reducing economic growth. This should negatively affect South Africa’s exports and GDP growth. Sluggish local economic activity is negative for company earnings and places pressure on share prices.
The bond market and rand mostly move in the same direction so I will talk about them in unison. A global trade war is likely to see global investors move into safe haven assets like the Japanese yen and US Treasuries (government bonds). A move into US Treasuries should boost the dollar and cause a relative depreciation of the rand. Foreigners may sell South African bonds to switch into safer US Treasuries. Both the rand and bonds could come under selling pressure due to the risk-off sentiment originating from the trade war.
If you are concerned about the impact of a trade war on your portfolio then consider a balanced investment in global markets. The Sharenet BCI Global Balanced has exposure to a broad range of asset classes and countries, truly ‘taking the eggs out of one basket’ and placing them around the globe to ensure no overexposure to any asset class or country.
Quantitative Investment Analyst
Ian Stiglingh is a full time quantitative analyst, responsible for research of equities across all industries. Ian completed his degree in Mathematical Science in 2013 and his Honours degree in Financial Risk Management in 2014, both at the University of Stellenbosch. During his studies, Ian worked as an intern at Old Mutual Actuaries & Consultants as well as J.P. Morgan in Johannesburg, and is currently a CFA candidate