JAN-DAAN VAN WYK: Despite tariffs and GNU tension, there is still room for investment optimism

April started with a big bang as global financial markets experienced a multitrillion-dollar sell-off, rocked by US President Donald Trump’s shock “reciprocal” tariff announcement.

Locally, the double whammy of escalating political uncertainty and tariff announcements wreaked havoc on markets. However, beneath the swathe of negative daily news there is still cause for prudent optimism in SA financial markets.

Despite these challenging investment headwinds, several factors support a cautiously optimistic SA investment outlook: 

• Operation Vulindlela remains largely insulated from developments regarding the government of national unity (GNU), allowing structural reforms to continue regardless of fractured coalition politics. 
• The infrastructure investment programme is still on a sound footing. The Treasury is targeting fixed investment growth of 4.7% annually, translating to R1-trillion over three years. 
• Private sector capital expenditure is increasing, particularly in mining, manufacturing and construction, though recent developments may dampen this momentum. 
• Corporate resilience remains strong, with battle-hardened company management and robust SA companies after years of operating under challenging conditions. 
• Attractive valuations persist in equity and fixed-income markets, with SA equities trading at a discount to their emerging market peers. 
• Monetary policy flexibility provides room to counteract economic headwinds if needed. Current and currently expected future inflation is not standing in the way of cuts.

GNU under pressure

For our view on the markets to turn unreservedly optimistic again, the global and local challenges undermining broad economic and financial market prospects must get back onto an even keel, which could prove challenging.

The cohesion of the GNU, which is facing its first significant test with the national budget impasse, deteriorated further in early April when the DA, the second-largest party in the coalition, voted against the budget, creating profound uncertainty about SA’s governing arrangement. 

Two critical questions arise from these tensions: if budget amendments are required, particularly regarding the proposed VAT increase, what alternative revenue sources will enable the Treasury to maintain fiscal discipline? More fundamentally, what will become of the GNU itself?

Should the DA depart, the GNU may either incorporate smaller parties such as Bosa and ActionSA (the “middle road”) or bring in the EFF or MK party (the “low road”), an outcome that would probably trigger significant market concern. 

As one analyst has noted, the ANC has yet to fully accept the political limitations it faces due to it losing the national majority last year, and the DA has yet to learn how to operate as a part of, rather than in opposition to, the government.

US tariffs and trade relations 

Compounding domestic challenges, Trump’s “Liberation Day” tariffs have altered the global economic landscape. SA now faces the prospect of a 30% blanket tariff on exports to the US (with some exceptions), raising serious concerns about continued African Growth and Opportunity Act  (Agoa) eligibility.

The economic implications are substantial — we estimate these tariffs could reduce economic growth by about 0.3 of a percentage point and potentially increase inflation by up to a full percentage point through sustained rand depreciation. 

SA equities delivered a 5.9% return in the first quarter, though these gains were substantially eroded in early April. The performance in the first three months of the year was driven primarily by precious metals miners (+58.6%), masking negative returns in the broader market. Large-cap stocks (+8.5%) significantly outperformed small (-7.1%) and mid-caps (+0.1%). 

Fixed-income markets were initially resilient, with the 10-year government bond yield ending the quarter at 10.6% — a substantial premium over current headline inflation of 3.2%. However, these bonds remain vulnerable to domestic political developments. 

Monetary policy flexibility 

The SA Reserve Bank still has room to move after cutting the repo rate by 25 basis points to 7.5% in January and holding it steady in March. We consider current monetary policy to be tight, with a real repo rate of 4.3% compared with the neutral rate estimate of 2.5%. That gives the central bank flexibility to respond to economic challenges, though the Bank continues to view inflation risks as skewed to the upside. 

Money markets are pricing in one additional 25 basis points repo rate cut within the next year, creating a potential buffer against growth shocks if needed. 

The outlook for SA markets has undoubtedly become more complex. While risks have inevitably increased, compelling domestic valuations, continuing SA structural reforms and resilient businesses provide reasons for cautious optimism at home amid the global uncertainty. 

The path forward will require careful navigation through increasingly unpredictable terrain, and making emotional investment decisions is not the answer.

Rather, it is time to rely on balanced, diversified investment portfolios that are in the best position to minimise losses and take advantage of opportunities as they arise. 

• Van Wyk is associate director at Stonehage Fleming Investment Management.