As a recent article in The Economist points out, America remains an economic powerhouse with performance that readily outperforms every other major economy in the world. Since 1990, the US economy has grown from two-fifths of the GDP of the G7 nations to half.
Output per person is some 30% higher than in Western Europe and Canada, and 60% higher than in Japan – a gap that has doubled since 1990. There is no evidence that emerging markets will close the gap any time soon, either. China, for example, has seen nominal GDP slip from about three-quarters of America’s in 2021 to two-thirds today.
It’s the US’s unique advantages in terms of natural resources, the size of its consumer market, and the dynamism and innovation of its private sector that sets it apart. Not only is the US blessed with abundant farmland and oil, it is also the leader in space exploration, digital technologies like artificial intelligence and the internet, and biotechnology.
These virtues, combined, have helped to turn the US dollar into the world’s reserve currency and its equity markets into a creator of significant wealth for investors around the world. As The Economist notes, the US’s seven big tech firms are worth more together than the stock markets of Britain, Canada, Germany and Japan combined.
However, it is important to be mindful that the US economy may not be immune to poor political decisions forever. There is a polarising presidential race underway at a time when the US’s budget deficit is running at around 6% of GDP – a level rarely seen outside of wars and economic crises.
Even as the US’s debt mountain continues to grow, both presidential candidates are making extravagant promises to the electorate in terms of federal tax breaks and spending. While Donald Trump favours tax cuts for the rich and corporations, Kamala Harris is promising giveaways to the middle and working class.
As concerning are Trump’s ambitions to impose massive tariffs on imports as well as deport millions of workers. These steps could be ruinous for the US economy in the short-term as it would need to adapt to significant disruptions to supply chains and the labour market as well as a surge in inflation.
With most polls indicating that the race balances on a knife’s edge and that Trump’s momentum is growing, investors should be braced for a win from either candidate. We would hope that electioneering promises made by the winning candidate do not translate into harmful partisan policies post the election.
However, while there are some risks, we believe that America’s broad-based economy and the strength of its institutions will endure. Congress and the courts should also provide a counterbalance for any presidential excesses over the next four years.
“There is no knowing how bad a president’s ideas have to be before things start to fall apart. The turning point may not come tomorrow, or even in the next four years. But with every mistake that politicians make, it draws another step closer.”
– The Economist
“Investors love a good story, and politics makes for spicy plot lines.”
– Emily Graffeo, Journalist at Bloomberg
Global News
- According to a recent Reuters/Ipsos poll, Democratic US Vice President Kamala Harris holds a slight lead over Republican Donald Trump, with 46% to 43%. This lead, recorded in a six-day poll that closed on Monday, is only a minor change from her previous 45% to 42% advantage in a poll conducted a week earlier. The Bloomberg News/Morning Consult poll yesterday indicates that the candidates are statistically tied among likely voters in all seven swing states. Early voting has begun in these states, with 17 million people having cast their ballots nationwide as of Monday.
- Despite US election uncertainty, the dollar is on track for its best month since 2022 as traders reprice Fed expectations and prepare for a presidential election that threatens to upend macro markets. The greenback rose against all its G10 peers on Wednesday, matching a steady climb in Treasury yields. Investors heavily sold the yen, which fell below the 153 per dollar mark to its weakest level in 12 weeks before paring losses, while the euro and pound both slipped for a third-straight session. A Bloomberg gauge of the dollar is up some 3.1% in October.
- Meanwhile, Americans are still grappling with the cost of living given that the government’s key inflation measure excludes several major everyday costs that have surged in recent years. Property taxes, tips, interest charges from credit cards to auto loans, and other expenditures aren’t factored into the Bureau of Labor Statistics’ consumer price index. As a result, there is a disconnect between what US inflation data show and what millions of Americans experience with their finances.
- While the S&P 500 is at near record highs, bonds have continued to decline as investors weigh the possibility of slower US interest rate cuts, a trend that could disrupt debt positions globally. This selloff resulted in yields on two-year Treasuries rising by as much as two basis points on Tuesday, while 10-year yields briefly exceeded 4.2% for the first time since July. The rate on 10-year German securities also reached its highest point since early September. The selloff extended to Asia, with Australian benchmark debt yields climbing by as much as 16 basis points. On Wednesday, Japan’s bonds became the latest to be affected by the global debt selloff.
- Bank of America has said that gold could hit as much as $3,000 an ounce next year as global markets grapple with rising geopolitical tensions and fluctuating economic signals. Now seen as the ultimate safe haven, gold breached $2,700 on Monday and has posted a 40% increase over the past year. (Our local Dynasty Ci Wealth Preserver Fund comprises a 7.25% direct exposure to gold via an ETF).
- International Monetary Fund (IMF) managing director, Kristalina Georgieva, is cautiously optimistic about global growth prospects and urged world economies to continue lowering interest rates during the opening of the 2024 Annual Meetings of the IMF and the World Bank Group in Washington D.C. on Monday. Global output will expand by 3.2% this year, 0.1 percentage point slower than a July estimate, the IMF said in an update of its World Economic Outlook released on Tuesday.
- On Wednesday, India’s Prime Minister Narendra Modi stated that BRICS should not position itself as an alternative to global organisations, despite efforts by founding members like Russia and China to expand the group to challenge the US-led global order. Instead, he emphasised that BRICS should focus on reforming institutions such as the United Nations Security Council and multilateral financial institutions. His remarks highlight the difficulty Modi faces in balancing relations with Russia, which India relies on for affordable oil, and the US, which offers access to advanced technology to enhance manufacturing and create jobs in India.
- On Wednesday, Tesla reported an unexpected improvement in earnings for the third quarter, lifting its recently battered shares in after-hours trading. However, the 6% increase in sales volume is a large decline from when it was reporting a 50% annual growth in vehicles sold not long ago. CEO Elon Musk told investors he expects a 20% to 30% growth rate next year. The company said the average cost per vehicle built came down to its lowest level ever at $35,100, down about $2,400, or 6%, from a year earlier. Its shares surged the most in more than 11 years on the news, jumping 22% yesterday.
- ASML Holding CEO Christophe Fouquet expects pressure will grow from the US to further restrict sales of semiconductor technology to China, the biggest market for the Dutch producer of chipmaking machines. As the US seeks to limit China’s rise in the semiconductor sector through export controls that have targeted the sale of advanced artificial intelligence chips and chipmaking equipment, the Dutch government has struggled to find a middle ground.
- L’Oreal’s sales were below expectations as it declined for the fifth straight quarter. Sales were 6.4% lower year-on-year. L’Oreal’s shares fell as much as 3.4% in early trading on Wednesday and are down about 20% since the start of the year. (One of our preferred actively managed funds, namely the Fundsmith Equity Fund, has exposure to L’Oreal in its top 10 holdings as per the latest Fund Fact Sheet dated 30 September 2024).
- As at Thursday’s close the S&P 500 was 0.9% down for the week.
Local News
- Sanisha Packirisamy, chief economist at Momentum Investments Group, argues that, as the US election approaches, a second term for Trump could bring economic turbulence for South Africa and other emerging markets, while a victory for Harris might foster international cooperation. Each path presents unique challenges and opportunities for Africa, with the balance of power in the US Congress likely to shape future policies.
- The rand has weakened due to a rise in global risk aversion ahead of the US elections, as markets are uncertain about the outcome and its potential impact according to Investec chief economist Annabel Bishop. The rand has averaged R17.53/$ so far this quarter. Commodities currencies like the rand have weakened as global manufacturing production slumped in the world’s largest economies. The rand’s strongest level so far this year was R17.03/$, which it reached at the end of September by benefitting from the larger-than-expected US interest rate cut.
- BlackRock, the world’s biggest asset manager, sees the recent rally in South African assets as a tactical opportunity, though talk of economic reforms needs to be translated into concrete measures for those gains to continue. The classification of South Africa, which has benefited from the formation of a business-friendly coalition at the end of June, compares with the “conviction” view the company has on other emerging markets such as India and Mexico, based on its views on long-term growth and sustained money flows.
- Peter Bruce, editor-at-large at BusinessLIVE, states that the ANC has now realised it is in a real coalition government and that it is no longer in charge even though it is the biggest party. Referring to the presentation of a draft medium-term development plan encompassing input from various ministers, Bruce writes that the DA ministers shot these down and the ANC discovered they would not be easy proposals. The plan, President Ramaphosa had previously said, would inform the medium-term budget policy statement that Finance Minister Enoch Godongwana will present next week.
- Ramaphosa’s bilateral meeting with Russian President Vladimir Putin, during which he reaffirmed Pretoria’s ties with Moscow, exposed the inherent intra-Government of National Unity divisions on foreign policy. During the meeting with Putin on the sidelines of the BRICS summit of emerging powers in Kazan, Russia, Ramaphosa described Russia as a “valuable ally and friend”. Ramaphosa’s remarks angered DA leader and minister of agriculture, John Steenhuisen, who rejected the president’s position of Russia being South Africa’s ally. Foreign investors are unlikely to move back into local bond markets until the middle of next year, according to Nedbank, despite improvements in the economy. The bond market has seen an exodus of foreign investors since 2017, when ratings agencies S&P Global and Fitch downgraded the sovereign rating to below investment grade, with Moody’s following suit in 2020.
- The South African Revenue Service (SARS) is owed an estimated amount of R800 billion, which remained uncollected annually from individuals and companies, according to an end-March tax account reconciliation. Commissioner Edward Kieswetter told MPs on Monday that the figure includes debt owed to SARS, outstanding returns, and actual uncollected inventory.
- Over the last five years, state-owned entities have secured more than R283 billion in bailouts, of which almost R70 million has been flagged as irregular expenditure. At government departments, R50 billion of the spending in the past five years was classified as irregular spending. This is according to the auditor-general, who was addressing MPs on Tuesday.
- Inflation slowed in September for the fourth month running, reaching its lowest level since March 2021 as fuel prices continued to fall, paving the way for another interest rate cut in November. Annual consumer inflation eased to 3.8% from August’s 4.4%, Statistics South Africa reported on Wednesday. Food inflation in September remained unchanged from August’s 4.7%.
- Research released yesterday shows that Black Friday could add R88 billion to the economy. This comes as consumers seem to be more interested in the annual sale than in any of the past three years. Among the factors that have helped to improve the economic outlook include vastly reduced load shedding, the introduction of the Two-Pot retirement system, an interest rate cut, and lower inflation.
- In his first 100-day update on Monday Prosus CEO Fabricio Bloisi reported strong, profitable growth following increased AI use across the company’s internet businesses. He expects Prosus’ e-commerce investments to turn profitable by early 2025 and aims to double the company’s value to $100 billion by focusing on fast-growing, profitable businesses, with further investments planned in AI.
- Sasfin reported full-year results on Tuesday, expressing regret over alleged fraud involving employees who aided Gold Leaf Tobacco in money laundering, resulting in a R160 million fine. Criminal charges were filed against those involved, and Sasfin sold its forex business. The group posted a headline loss of R58.68 million for the year ending June, following a profit of R112.68 million in 2023, and plans to exit banking by 2025.
- Famous Brands, which owns Debonairs Pizza, Steers and Wimpy restaurants, has closed 41 outlets in the past six months due to shifting demographics and persistent economic pressures that are weighing heavily on consumers. Famous Brands reported a 0.8% increase in revenue at its leading brands division for the six months to August, though revenue was down 10.4% at its signature brands segment due to the closures and lower franchise fees.
- Clicks, a health and beauty retailer, is nearing a market capitalization of R100 billion, with shares rising 34.9% to reach R89 billion in the year ending August, driven by robust growth and ambitious expansion plans. Clicks remains open to acquisitions and is actively pursuing strong organic growth opportunities.
- As at the time of writing, the rand was 0.15% weaker against the dollar, and the ALSI was 0.5% down for the week.
Sources: Dynasty, Business Report, BusinessLIVE, Bloomberg, CNN, Reuters, Moneyweb, Daily Investor, NYT, etc.