The challenging relationship between the world’s two biggest economies, China and the USA, has a global knock-on effect, primarily in the countries in which the two have substantial interests. Already facing other economic and trade headwinds, what does this mean for the African continent – and South Africa, in particular?

A combined effect

Izak Odendaal, Investment Strategist at Old Mutual Multi-Managers, says that South Africa feels the impact of this international situation indirectly. “To the extent that the trade war launched by US President Donald Trump in 2018 and largely maintained by his successor, Joe Biden, has weakened the global economy, it negatively impacts South Africa,” he says.

“All else being equal, a stronger global economy and positive risk appetite on global markets is good for South Africa. But a lot of other things have gone wrong since 2018 – including Covid-19, the war in Ukraine and global inflation – so it’s hard to isolate the impact of US-China tensions, specifically.”

Trade fever

Odendaal thinks that the effect of trade tensions between the two superpowers hasn’t really been felt much in South Africa, yet. “For instance, we haven’t had to give up our Huawei smartphones and we’re not going to ban TikTok.

“Hopefully the experience with Covid and then the war in Ukraine has taught people that firstly, we shouldn’t take for granted that global supply chains always function seamlessly; and secondly, that the key goods we consume – particularly food and fuel – are priced globally,” he says. “When there’s an increase in international food prices, we don’t escape the impact locally even though we are a big food producer too.”

He reckons that it’s unfortunate that there is so much misinformation in the public domain on various topics including the war in Ukraine, de-dollarisation and BRICS. He says that it’s difficult to imagine average South African having a clear picture of how small South Africa is in the global context and how we are buffeted by these big international trends.

Related issues that may affect SA trade

Odendaal emphasises distinguishing between fixed and portfolio investment when considering the importance of investment by the US and China in South Africa.

“Fixed investment is foreign companies setting up shop here for the long-term – the US is one of the biggest sources of fixed investment in SA, significantly more than both China and Russia. These investment decisions are largely made on commercial, not geopolitical, terms.

“Something like access to the African Growth and Opportunity Act (AGOA) can feature in a company’s decision-making if they plan on exporting to the US from South Africa (think of a manufacturer like Ford, for instance). But they will probably spend more time thinking about the domestic situation, like electricity, transport, skilled labour and crime.”

He says that portfolio investors, on the other hand, can leave at the push of a button and are therefore less concerned about the long-term, but they do care about sentiment and perceptions.

“The recent declines in the rand mean New-York or London-based portfolio managers have lost money on their SA bond and equity investments. Nonetheless, these investors are always assessing the risk and return payoff of SA assets. At some point, the bonds, equities and currencies will be so cheap that the return profile will become attractive even if there’s no real improvement in the fundamentals.”

The pension-fund perspective

When it comes to investment in local pension funds, the impact is complex and dynamic. “If South Africa is increasingly shunned by global investors, we should expect our financial assets to trade at a discount. This is already happening of course, but the discount could still widen,” Odendaal believes.

“As noted earlier, at some point the discount is so wide that it becomes attractive, but in the meantime, it means disappointing capital returns on bonds and equities, bearing in mind that bonds have the advantage of high-interest payments that can offset the capital returns, of course.”

Odendaal further explains that the same process has driven the rand to record low levels against the dollar. This has the benefit of boosting the value of offshore investments and rand-hedge shares on the JSE, but it has also resulted in the Reserve Bank hiking rates by more than it would have otherwise. This in turn worsens the outlook for domestically focused shares. “Managing these crosscurrents will clearly require a cool head and a sound investment process.”

In terms of investment decisions for the future, there are several big global trends underway that intersect with the US-China relationship, including climate change and a transition to greener economies, the search for greater supply-chain resilience, resource nationalism and the rise of artificial intelligence and other advanced technologies.

“These issues present risks and opportunities to businesses everywhere. In addition, local businesses have to contend with crumbling infrastructure, skills shortages, crime and a general sense of uncertainty,” says Odendaal.

“These too present risks and opportunities. The trick is in managing the risks and grabbing the opportunities, which is easier said than done.”