You're listening to Strictly Business Podcast with Lindsay Williams.
Global bond markets have been generally cheered up in 2024 by two things,
falling inflation and thus falling interest rates.
And then came Donald Trump, the next president of the United States,
campaigned on a lower inflationary environment to the United States.
But the markets, after his confirmation as the next president, sort of took a
different view.
With me is Adam Furlan, portfolio manager at 91.
in Cape Town.
Quite a strange reaction from the market initially, but then when you delve into
the details, not so strange, Adam.
Yes, that's correct, Lindsay.
And I think the most predominant standout move post, you know,
the Donald Trump victory is the move in the US dollar.
And the US dollar has appreciated against the G7 currencies as well as EMFX in quite
a big move.
The US dollar kind of has everything going for it at the moment.
It has.
higher yields, better interest rate differentials, as well as now, you know,
the push on growth that the market is expecting as a result of, you know, the
Republican sweep,
Donald Trump doing deregulation, tax cuts, likely to buoy growth in that economy.
Yes, I mean, let's go back to the very basic stuff that I understand.
And that is that if interest rates are not going to fall as fast as many people have
anticipated in 2024,
going into 2025, and beyond.
then the dollar strengthens because of the yield factor and therefore bond markets
are under pressure.
Is that too simplistic an argument?
I think that is fair for the first order.
And, you know, that is what has been happening in the markets more recently.
The expectations of the Fed have repriced significantly in the front end.
About 50 to 75 basis points of rate cuts have been taken out of market expectations
over the
coming year.
And we had actually remarks from Fed Chair Powell overnight,
firstly saying they don't need to be in a rush.
You know, they expect inflation to return to target, but it's going to be a bumpy
ride.
Sort of, you know, reiterating that, you know, they may slow their easing cycle and
not go.
consecutively going forward.
And, you know, furthermore,
he continues to add that they will not try and preempt any fiscal policy changes
ahead of
time because it is too uncertain.
And that's obviously a very dangerous game for a central bank to be playing.
But ultimately, those rate cuts have come out of the US more than anywhere else.
And that is making the dollar look far more an attractive currency to be holding
relative to the rest of the world.
Adding to that, you know, trade tariffs, the expectations of tariffs further
increases,
you know, the market's expectation that the dollar will be appreciating relative
to emerging
market currencies as well as G7 currencies.
Now, I don't want to be disparaging about politicians, but there have been cases in
the past, one or two maybe,
where they haven't kept their pre-election promises.
Is there any chance?
that, for example, the new Trump administration will not initiate a broad
round of tariff
introduction and will not do some of the other things like massive across the board
tax cuts,
which will fuel demand in the economy.
Is there any chance that it was just all bluster?
Or do you think this time it's going to be a reality?
I mean, I think you have to take him at his word.
However, you know, what was initially proposed when he was in his campaign was,
you know,
60% blanket tariffs on Chinese goods, on all Chinese imports into the US,
20% blanket tariffs on the rest of the world.
That is likely not to pan out in that manner.
We expect something a bit more targeted.
Blanket tariffs would be extremely disruptive and not achieve essentially
what he is trying to achieve.
So we expect certain sectors, most likely vehicles, chip manufacturing, and
probably a focus more on economies where the U.S.
has a very significant trade deficit.
And that is China, Europe and Mexico.
So definitely probably a softer outcome than what has been promised.
But we do think there will be significant shifts on the tariff front as well as on
the tax front.
You know, it is what he is aiming to deliver.
And we expect now that he has control of.
both the Senate and the House, we expect they will be able to deliver on those.
Yes, he is all-conquering and all-powerful at the moment, and feeling very, very
confident having seen various speeches recently.
So let's say that the interest rate cycle is still in place, interest rate cutting
cycle is still in place,
but it's not going to be quite as aggressive as it might have been.
pre-Trump.
Now, the dollar will then remain firm.
And what does that mean for emerging market currencies, particularly vulnerable
ones?
I mean, maybe even the South African RAND may come under pressure and also the
ability of emerging market governments to service debt,
because if interest rates don't come down, that means that their debt burden remains
the same, or even gets worse, if heaven forbid,
interest rates start to rise.
Is there a risk to emerging markets because of Trumpflation? There is
definitely
risks that we do start to see inflation uptick as a result of certain Trump
policies.
But it is a double-edged sword because on the one hand, tariffs would be
inflationary in some aspects,
but the impact that they may have on global growth may actually offset the
actual tariff on
inflation.
On the other hand, other policies that Trump is looking to implement, tax cuts,
deregulation, are positive for global growth.
And, you know, in that environment, as we've seen equity markets rallying quite
strongly on the back of his win in
that positive global growth environment, that's an environment that emerging
markets actually like.
So it is very much, you know, we think quite focused, particularly in South
Africa, on, you know,
what is happening to commodities?
You know, what is the impact on China?
How is China likely to respond to tariffs that are being put on on that economy?
And, you know, as we've seen in this more recent move,
whilst the move was most definitely driven by rate differentials, you know, the South
African terms of trade have actually declined,
you know, with softer commodities, softer precious metals.
The currency has declined in line with its terms of trade move,
which has been weaker since the outcome of the Trump election.
So medium and long term is what you're saying is the way I interpret it is.
that Trump's administration reigniting the US economy and thus the world's economy is
good for countries like South Africa who are commodity producers because commodity
demand is likely to go up.
I wouldn't say outright good.
It's very hard to determine at this stage what is going to be the driving factor,
what will be the dominant force.
Is it the tariff outcome, the isolationist sort of economic outcome that actually...
is detrimental to emerging markets, or is it the growth side of the ledger that
actually buoys global growth as a
whole and actually offsets the negative impacts of tariffs on emerging markets?
It is very tough to determine that at this stage,
also given we don't know the magnitude of each side of each fiscal and tax change
that will be made.
But it is not necessarily, you know, completely negative for emerging markets,
the policy that Trump will be implementing.
Post-Trump, has 91 had a re-look at its investment strategy when it comes to
bonds, to currencies,
and also the impact of foreign direct investment in South Africa and other
countries?
Have you sat down and said, OK, this could happen, therefore we should do this, or
should look to do it,
should it come to fruition next year?
Yeah, most definitely.
We have sat down and thought about various scenarios of US policy changes.
then looked at what that means for the Fed in particular,
what is that likely to mean for the dollar emerging market currencies,
and then assess within our portfolios,
how can we position the portfolio to give us room to counteract moves that we think
are
quite extreme.
So currently positioned relatively conservatively,
and are waiting for better levels to actually add to fixed income assets in
particular,
because we see the market quite aggressively,
the quite aggressive repricing out of fixed income assets that we've seen,
we think is potentially slightly overdone.
Adam, thank you very much for your analysis.
Adam Furlan is a portfolio manager at 91 in Cape Town.
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