Trump and the Impact on South African Equities

The trade policies and rhetoric under Donald Trump’s administration have significantly influenced global markets, including South African equities.

In November, Trump announced aggressive tariffs targeting China, Mexico, Canada, and other nations. A U.S weighted average tariff of up to 18% spurred fear-driven markets, with U.S. Treasury yields increasing aggressively as investors priced in heightened economic uncertainty. This raised concerns about a potential global trade war, a scenario that could halt global trade and significantly impact economies.

While Trump’s rhetoric has been aggressive, it is unlikely that he will implement such extreme tariffs. His advisory committee includes sound economic advisors, and his first term demonstrated strategic targeting with focus more towards intermediate goods, protecting consumers. Trump is likely to adopt a more measured approach, as evidenced by his comments during an interview following the inauguration where he said he’d prefer not to impose tariffs on China. This shift in tone has alleviated some market fears.

The strengthening of the South African rand since Trumps inauguration suggests that markets are adjusting to his more pragmatic stance. However, the risk of a trade war remains, and this has forced investors to be selective about stock choices in a volatile macroeconomic environment.

The volatile Rand and global uncertainty at the start of the year have led to a more cautious approach toward South African assets. SA Inc stocks, such as retailers and banks, have been more volatile due to their sensitivity to domestic economic headwinds, prompting investors to shift toward sectors with greater resilience to local risks.

Small Caps: Finding Opportunities Amid Risk

Small-cap stocks, particularly those listed on the JSE, often underperform in risk-off environments. However, selective investments in companies with strong equity stories and export exposure can mitigate these risks.

One standout is Reunert, which has high export exposure to the Middle East, Europe, and India. The company specializes in defence equipment, a sector poised to benefit from increased global defence spending. Trump has been vocal about NATO nations and allies boosting their defence budgets, which aligns well with Reunert’s business model. This makes Reunert one of the few South African stocks offering exposure to the growing global demand for defence materials.

Infrastructure and Eskom’s Turnaround

Reunert is also well-positioned to benefit from Eskom’s infrastructure projects. Eskom’s recent turnaround has been notable, with significant improvements in operations. The state utility plans to roll out 14,000 kilometres of electrical cabling over the next decade as part of its transmission development plan. Reunert, as a key supplier of these cables, stands to gain from this long-term investment in South Africa’s energy infrastructure.

The current environment demands an extremely selective approach to stock picking. By focusing on companies like Reunert, which are aligned with key themes defense spending, export-driven growth, and infrastructure investments, investors can navigate market volatility more effectively.

As global tensions persist, including conflicts in the Middle East and rising tensions between China and Taiwan, defense expenditure is likely to remain robust. Combined with domestic infrastructure development, stocks with diversified revenue streams and exposure to these themes are well-positioned to deliver growth, even in a challenging macroeconomic environment.

In summary, while the risk of a global trade war lingers, strategic stock selection and a focus on businesses with strong fundamentals can help investors weather uncertainty and capitalize on emerging opportunities.