Share

How US election could impact SA

Cape Town - It is important to recognise how little influence the US president actually has on economic matters as Congress makes most of the relevant decisions, Dave Mohr (chief investment strategist) and Izak Odendaal (investment strategist) at Old Mutual Multi-Managers, said on Monday.

They pointed out that markets are already reflecting the anticipation of the US Presidential election, which takes place on Tuesday, 8 November 2016.

Mohr and Odendaal reckon markets have already clearly signalled their preference.

Every uptick of support for Donald Trump in opinion polls has been met with a sell-off. For instance, the S&P500 has fallen to its lowest level since July as the polls narrowed. South African equities have followed the US with the JSE All-share Index dipping to a level last seen after the Brexit vote, Mohr and Odendaal pointed out.  

Mexico, whose economy is heavily dependent on continued free-trade with the US, has seen its currency especially hard hit.

"It is in the realm of foreign policy where the US president has most influence. If Hillary Clinton wins as indicated by the latest polls, she will likely be hamstrung by a Republican-controlled Congress. Even with a popular vote behind her, she might be a lame-duck president from day one. This is possibly also weighing on markets," Mohr and Odendaal said in a statement.

Barring an extremely negative data point or severe market meltdown, they think an interest rate hike by the US Fed next month is likely. What this means for us in South Africa is that a stronger dollar will put pressure on the rand.

For the rand, the trend is ultimately determined by expectations for US interest rates, sentiment towards emerging markets and commodity prices, according to investment strategists.

READ: Don’t panic when stock market goes crazy after US election

"The key issue is not whether there is a hike now, but rather how many hikes there will be after December. If the Fed overreacts, the dollar could surge, placing the rand under tremendous pressure. However, a dollar that is too strong works against the Fed’s objectives and it is therefore unlikely that they will increase rates by too much," they explained.

"As it is, the rand has done very well over the past three weeks, supported by domestic political developments - the dropping of charges against Finance Minister Pravin Gordhan and the release of the Public Protector’s report on state capture - and firmer prices for our main commodity exports."

The gold price is around $1 300/oz again, while platinum is close to $1 000/oz. Iron ore prices lifted from $56 per tonne to around $66 per tonne. For iron ore, platinum and gold, the prevailing dollar price is still below the 2016 high point. But at $67 per tonne, the price of export thermal coal is at the highest level this year, up from $50 per tonne in January.

"At current levels around R13.50 per US dollar, the rand is more or less where it was last year. This level is probably weak enough to support exports and tourism, but it creates a bit of a problem for investors," say Mohr and Odendaal.

"Global equity markets moved sideways in US dollars over the past two years, but local investors benefited from persistent depreciation in the rand to boost offshore returns. No more. Similarly, the large rand-hedge component of the JSE benefited from a weaker rand."

READ: World stocks choke on US election fears, pound powers on

They said the rand tends to overshoot on the upside and downside, but at the moment the rand-dollar exchange rate is well below the average of R14.50 for the second half of 2015 and the first half of 2016.

"This is positive for the inflation and interest rate outlook. The rand has gained 15% against the Chinese yuan this year, which is notable given how many consumer goods are imported from China."

The pair also said government’s Crop Estimates Committee recently projected that farmers would plant 2.4 million hectares of maize for the next growing season, a 26% year-on-year increase.

"This points to a rebound in agricultural production and downward pressure on food inflation. The oil price has also given back some of its recent gains as it appears less and less likely that oil producers will stick to agreed production cuts."  

Regarding the planned fiscal consolidation, Mohr and Odendaal said it is a headwind for the local economy.

"However, Treasury has been careful not to close the deficit too quickly to avoid tipping the economy into recession. Either way, the continued commitment to fiscal discipline is important for the longer-term health of the economy," they said.

Arthur Kamp, economist at Sanlam Investments, said on Monday policy differences between the two presidential candidates are significant.

If neither the Democrats nor the Republicans take full control of Congress, policy changes are unlikely to be far-reaching in the near term, in his view.

READ: S&P 500 falls for 9th straight day ahead of US elections

"Financial markets, notably the currency market, may show something of a response either way, but ultimately proposed legislative changes that have a meaningful, lasting impact on the economy are likely to take a long time to implement - or may never be implemented," he said.

"There is a high level of interest in the likely fiscal stance of each candidate. At the risk of over-simplification, both candidates appear to favour fiscal expansion. That would fit in with the thinking of a growing number of economic commentators who believe monetary policy is approaching the limits of its potential influence over real economic activity and inflation expectations in the large developed economies."

The solution being offered is increased government spending, on condition that it focuses on fixed investment spending and is limited to countries where there is fiscal space. Kamp said the expectation is that the Democrats, led by Clinton, would favour increased spending funded by tax increases focused on the wealthy and business, whereas Republicans led by Donald Trump are expected to pursue increased spending and some tax cuts at the expense of a larger budget deficit.   

"Ostensibly, therefore, a Trump presidency with its implied loose fiscal policy stance would require a more hawkish US Federal Reserve. This makes it difficult to untangle the likely impact on emerging market economies. To the extent there is a focus on infrastructure spending, commodity producers should, all things being equal, benefit," said Kamp.

"But, a more aggressive US Federal Reserve relative to current expectations may hurt highly indebted emerging market economies, notably those still running significant current account deficits – especially if a more stringent monetary policy stance is accompanied by dollar strength."

READ: US election uncertainty hits stocks

To Kamp one of the more important potential implications, including the global economy, is the stance of each candidate on global free trade.

"Trade liberalisation has lost a great deal of momentum around the world since the global financial crisis amid concern over job losses and downward pressure on real wages, which are viewed, among numerous voters in some countries, as being directly attributable to the shift towards freer trade," said Kamp.

The key question for him is whether the problem is the idea of free trade in itself, or if it is inadequate support of an appropriate labour supply response.

As for the immigration issue, Kamp said a Trump Presidency is expected to favour greater control over immigration.

"However, while not influential in the near term, demographics play a key role in the long-term outlook for economic growth. When population growth ebbs to the point where it eventually falls outright, the only means to promote gross domestic product (GDP) growth is through productivity gains. That is not easy to do consistently over the long-term," he said.

"In the end, it is these decisions about free trade and the movement of people, made today in the land of the free, which appear set to have significant long-term implications for the US and the global economy."

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.03
-0.7%
Rand - Pound
24.01
-0.5%
Rand - Euro
20.54
-0.3%
Rand - Aus dollar
12.36
-0.0%
Rand - Yen
0.13
-0.6%
Platinum
900.50
+0.4%
Palladium
1,002.25
+0.1%
Gold
2,209.77
+0.7%
Silver
24.53
-0.5%
Brent Crude
86.09
-0.2%
Top 40
68,080
+0.6%
All Share
74,278
+0.5%
Resource 10
56,967
+2.4%
Industrial 25
103,572
+0.3%
Financial 15
16,456
-0.4%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders