This has been a relatively action-packed week on the geopolitical front, with Israel stepping up its airstrikes against Hezbollah targets in Lebanon, Russia’s President Vladimir Putin rattling his nuclear sabre and China test-firing an intercontinental ballistic missile into the Pacific Ocean.
As these developments show, we are living in an era of heightened geopolitical tension, characterised by a shift from a unipolar post-Cold War order dominated by the US. Powers in the global south – particularly, India, China and Russia – are flexing their muscles and trying to create a new multipolar system.
As the new world searches for a new equilibrium, we are seeing competition between global and regional powers escalate – from trade wars between the US and China and the quest among BRICs members to de-dollarise, through to military conflict in Ukraine and Iran’s role in stoking the conflict in the Middle East.
Recent surveys, such as the Invesco Global Sovereign Asset Management Study 2024, show that geopolitical concerns have overtaken inflation as the primary risk factor for central banks and sovereign wealth funds. Yet, despite the fact that many international relations analysts warn that we are living in one of the most dangerous geopolitical climates since the Berlin Wall fell, markets have shown extraordinary resilience over the past two years, with the MSCI World Index having surged by 63.5% since its trough in October 2022.
Markets currently appear calm notwithstanding an escalation in military activity in Russia-Ukraine and the Middle East
It appears that even when equities have fallen in response to geopolitical developments, they have quickly bounced back. Just this week, the S&P 500 completely ignored any worrying geopolitical news to power to its 42nd record high – still benefitting from the tailwinds of last week’s Fed interest rate cut.
What this shows is that macroeconomic factors tend to have a more profound effect on markets than geopolitics. Markets are prone to be much more influenced by interest rates and inflation – and the actions of central banks, especially the US’s Fed – than by geopolitical currents.
It is worth noting, however, that supply side events caused by conflicts can have profound effects on the global economy. Russia’s invasion of Ukraine in 2022 was a case in point. The conflict severely disrupted the German manufacturing sector as Russian gas supplies were cut off, while wheat and grain exports from Ukraine were severely curtailed. These impacts turbocharged global inflation which led to a torrid year of equity market performance with the MSCI declining by 17.8%.
Right now, supply chain impacts seem to be of limited concern. Supply chains today are more resilient and diversified, as we have seen from how quickly global markets compensated for shocks such as COVID-19, the disruption of gas and oil supplies from Russia, and Houthi attacks on Red Sea shipping.
It is instructive to compare how low oil prices are right now to the spike in energy prices in the immediate aftermath of the Ukraine invasion when the price of Brent Crude spiked at just over $130/bbl. Saudi Arabia’s decision to abandon its unofficial price target of $100 a barrel for crude to regain market share is a sign of the times.
While some commentators believe this is one of the riskiest geopolitical times since the Cuban Missile Crisis, it seems that the interest rate and inflationary environment will play a larger role in determining the direction of the markets. Supply-side risks may not be especially elevated compared to other periods in recent years. Indeed, factors such as the economic interdependence of competing powers, diverse and robust supply chains, and international forums for conflict management offer counterpoints to the argument that these are especially perilous times.
Our view is that barring a supply shock that is severe enough to disrupt global economic output, it’s the interest rate loosening cycle and corporate earnings that will influence markets for the next few months – even with a US presidential election on the horizon. And current geopolitical instability will not necessarily undermine asset growth in the longer term.
“Over the last few years, markets have been conditioned not to overreact to political and geopolitical shocks for two reasons: first, the belief that there would be no significant subsequent intensification of the initial shock; and second, that central banks stood ready and able to repress financial volatility.”
– Mohamed A. El-Erian, chief economic adviser at Allianz
“Geopolitics has an impact in the short term, increasing volatility and can lead to profit-taking in markets, but the macro is more important, understood as growth, inflation, what central banks do with interest rates… and the micro, that is, business results, what companies do and their profits in the medium term.”
– Natalia Aguirre, director of analysis at financial services company Renta 4
Global News
- The war between Lebanon and Israel has escalated this week with the Israeli Defence Force (IDF) launching dozens of strikes against Hezbollah infrastructure sites in southern Lebanon. At the same time, Hezbollah this morning said they fired rockets into Haifa, with the IDF saying some of the rockets were intercepted while others fell on open areas. This comes as Israel prepares for a ground invasion. Lebanon’s foreign minister has warned that the crisis “threatens the entire Middle East” and many hardline conservatives in Iran grow uneasy about its lack of action as Israel targets Hezbollah, their country’s closest and most long-standing ally.
- The global economy is settling into newfound stability as the stress of high inflation eases, allowing central banks to keep cautiously loosening policy, according to the OECD. It made only small changes to its outlook compared with May for most countries, and slightly raised its 2024 global output forecast by 0.1 percentage points to 3.2%, the same pace it expects next year. According to the OECD, price increases will be at target in most Group of 20 nations by the end of 2025.
- Morgan Stanley Investment Management deputy chief investment officer and head of macroeconomic research for emerging markets, Jitania Kandhari, says Fed interest-rate cuts and a weaker dollar are opening the door to a period when emerging-market equities outperform US stocks. The MSCI Emerging Markets Index is up 11% so far this year, although trailing the S&P 500, which is up 20%, for a sixth straight year as of 24 September. The ratio between the two gauges is at the lowest level since the 1980s when investors first started treating emerging markets as a distinct asset class. (Dynasty’s global equity portfolios have indirect exposure to emerging markets, in that our holdings comprise developed market listed multinationals that conduct business in these regions.)
- Oil slid for the second day on Thursday as Saudi Arabia said it would increase output in December, while Libya named its new central bank governor, opening the way to reviving some crude production. The global benchmark Brent slid to just above $71 a barrel. Saudi Arabia is ready to abandon its unofficial oil price target of $100 a barrel in a bid to regain market share, the Financial Times reported, citing sources.
- Gold hit a record of $2,685 an ounce on Thursday, exceeding the all-time high set in the previous session. Traditionally perceived as a safe haven, gold has climbed roughly 30% this year, outperforming the benchmark S&P 500 index’s 20% gain. That has in part been driven by a jump in demand from central banks including in China, Turkey and India, who have added to their gold piles this year to diversify away from the US dollar. Silver climbed as much as 2.8% to $32.71 an ounce on Thursday, extending this year’s gain to 37%. Both metals gave up some of their early gains after the latest US data showed the labour market remained resilient. (Dynasty has direct exposure to a gold ETF in our house-view Dynasty Wealth Preserver Fund.)
- A handful of Fed officials have left the door to open additional large interest-rate cuts, noting that current rates still weigh heavily on the US economy. Incoming data will guide their decision-making. The next interest rate policy meeting will occur between 6 and 7 November, just after the presidential election.
- Congress gave final approval to a short-term spending Bill on Wednesday to avert a government shutdown just ahead of the November elections. It seems there may be a bigger funding fight at the end of the year given that all those who voted against the Bill were Republicans. President Joe Biden is expected to sign the legislation before the 30 September deadline.
- The Swiss franc gained on Thursday after the Swiss National Bank (SNB) cut its benchmark rate for a third time by just 25bps. A significant bulk of economists polled by Reuters forecast 25bps, with a slight majority saying the SNB would hold in December. Futures markets, however, had been evenly split on whether the SNB would cut by 25bps or go with a 50bps cut.
- On Tuesday, China’s central bank announced a series of measures to make it easier for households and companies to borrow money. The bank cut its benchmark seven-day interest rate to 1.5% from 1.7%. It also reduced minimum down payments for housing purchases and freed the country’s state-controlled commercial banks to lend a larger proportion of their assets. This is the boldest attempt by the Chinese authorities since the pandemic to revive economic growth, halt a housing market crash, and stop a broad decline in prices. Chinese stocks are set for their best week since 2008.
- Zimbabwe’s attempt to introduce a new currency is coming undone, just five months after initially being praised for taming an inflation spiral and exchange-rate volatility. Since 28 August, the ZiG, short for Zimbabwe Gold, has consistently lost value against the US dollar. It sells for 28 per dollar on the parallel market, a 50% discount to the official rate, stoking price distortions in the economy. This means that central bank Governor John Mushayavanhu needs to fix the currency or deal with the fact that there is limited hope it can be replaced.
- The global market for AI-related products is ballooning and will hit as much as $990 billion in 2027, as the technology’s quick adoption disrupts companies and economies, according to Bain & Company. The market, including artificial intelligence-related services and hardware, will grow 40% to 55% annually from $185 billion last year, the consulting firm said in its fifth annual Global Technology Report released on Wednesday. Growth will be fuelled by bigger AI systems and larger data centres to train and run them, driven by companies and governments using the technology to boost efficiency. Bain has warned that there may be shortages in semiconductors, personal computers, and smartphones.
- OpenAI CE Officer Sam Altman and Nvidia CEO Jensen Huang met with senior Biden administration officials and other industry leaders at the White House recently to discuss steps to address massive infrastructure needs for AI projects. Other attendees included representatives from Google, Amazon, and Microsoft. OpenAI pitched the need for massive data centres that could each use as much power as entire cities. Following the talks, the White House announced an interagency task force to help promote data centre development in the US and initiatives to support accelerated permitting for those facilities.
- The US Justice Department is accusing Visa of illegally monopolising the debit card market. It claims the card provider has gained the power to extract fees that far exceed what it could charge in a competitive market. For more than a decade, the department alleges, Visa has abused its dominant position in the debit card market to force businesses to use Visa’s network instead of competitors, and to stop new alternatives from entering the market.
- Ozempic and Wegovy’s cumulative sales will soon surpass Novo Nordisk’s entire research budget for the past three decades, undercutting a key argument for their unusually high prices. The pair of medicines for diabetes and obesity have sold nearly $50 billion as of the second quarter and are on track to make $65 billion by the end of this year, according to a Bloomberg News analysis of regulatory filings and analyst estimates. After adjusting for inflation, that would eclipse the $68 billion that Novo will have spent on all research and development since the mid-1990s, when the company started ramping up work on this class of drugs.
- As at Thursday’s close the S&P 500 was 0.75% up for the week.
Local News
- The rand continued its recent rally this week (primarily on the back of a weaker dollar), hitting a 20-month high at R17.13/$ on Friday, boosted by positive sentiment following interest rate cuts by the South African Reserve Bank and the US Federal Reserve. Analysts expect the rand to trade between R17.20 and R17.40 for now. (Our Investment Committee’s “currency decoder” on Wednesday indicated that the rand was trading at a slight premium to our fair value of R17.51/$.)
- Asset manager Old Mutual Investment Group has said that, despite the JSE reaching record highs after the general election in May, foreign investors are still taking a wait-and-see approach to local markets. The country is currently experiencing an underwhelming show of foreign confidence in local stock markets as foreign investors are still exiting the market, with around R95 billion leaving the country year so far this year as of the week to 6 September 2024.
- President Cyril Ramaphosa must urgently appoint a retired judge to conduct an inquiry into the National Prosecuting Authority due to its weaknesses and failure to successfully prosecute major corruption cases, according to the Centre for Development and Enterprise. The inquiry should probe the organisation’s leadership, performance, structure, and independence. A report by the Centre is part of a series on the priorities that the government of national unity should address to get the country back on track.
- Basic education minister Siviwe Gwarube has requested an urgent meeting with Finance Minister Enoch Godongwana as provincial education departments scramble to manage a collective budget shortfall of R28.7 billion for this fiscal year. The cash crunch is projected to soar to R118.2 billion by 2027/28, according to estimates from the basic education department. Godongwana and Treasury officials are finalising the medium-term budget policy statement, due to be announced on 30 October.
- Home Affairs has cleared the backlog of nearly 250,000 identity documents in one month after consolidating all the IDs that were ‘stuck’ in the system into a single database to systematically clear the backlog. The backlog started to accumulate in November 2023 following a change in IT service providers, which created a bottleneck in multiple areas in the production value chain, from the office of application through to application authentication, to printing and to final issuing of the ID.
- Last-minute talks between South Africa’s biggest political parties failed to save the mayor of Tshwane, Cilliers Brink, from a motion of no confidence after ANC Gauteng leaders ignored their national bosses. Business Day sources indicated that senior ANC and DA leaders were discussing a coalition agreement in Gauteng metros. Business Day editor-at-large, Natasha Marrian, writes that Gauteng has caused headaches for the ANC since 2014, when the party’s support slipped 10 percentage points to just 53%. “In terms of political strategy, the ANC in Gauteng appears to be aimless – with just two years to the local elections, it will have to find some ‘Gauteng exceptionalism’ to turn its fortunes around.”
- Landsdowne Property Group said recovery in the residential property market would take time even as the interest rate cuts and declining inflation are expected to boost the sector. According to Statistics South Africa, residential property prices in Cape Town increased by nearly 6% in the year to March. Prices in Johannesburg declined 1.3%, a performance that was worsened by the city’s unreliable water supply.
- A survey on behalf of Bank of America conducted by research firm Ipsos has found a record number of fund managers expect the Government of National Unity to implement “meaningful reforms” that could see the local markets deliver returns of more than 10% over the next 12 months. It found that asset allocators expect an average return of 17% on equities in the coming year, 8% for cash holdings, and 13% on government bonds maturing in 2035. (Dynasty maintains its preference for global equities as the optimal “engine” for long-term capital growth, while our research indicates that long duration SA bonds have not provided investors with an acceptable risk-return profile when compared against shorter duration fixed income instruments.)
- Naspers shares rallied to a record high on Thursday in a fifth straight session of gains, bolstered by improved sentiment towards China’s economy. By market close, the stock was up 6.67%, bringing its gains for the past week to about 13.5%. Much of Thursday’s rally appears to have been driven by the group’s largest investment, Chinese technology giant Tencent, which was up 6.07% in Hong Kong.
- British multinational bank HSBC has become the latest offshore banking giant to leave South Africa as international players battle to establish a significant presence in a market in which local lenders dominate. It will transfer its clients and banking assets and liabilities to FirstRand and smaller rival Absa. Its local branch employees will transfer to FirstRand. The deal is expected to be concluded in the last quarter of 2025.
- Private banking group, Investec, opened an office at the Dubai International Financial Centre, targeting thousands of wealthy South Africans living in the United Arab Emirates. Between 150,000 to 200,000 South Africans live in Dubai, while there are also UK expats living there. Investec’s anchor bases are in South Africa and the UK.
- As at the time of writing, the rand was 1.5% stronger against the dollar and the ALSI was 4.7% up for the week.
Sources: Dynasty, Business Report, Washington Post, BusinessLIVE, Bloomberg, CNN, Reuters, New York Times, Daily Maverick, Mail & Guardian, News24, TechCentral, Daily Investor, etc.
