The New Cold War

Over the past decade or so, we have seen geopolitical tensions start to flare up again, following the relative stability from the end of the Cold War in 1991 marked by the dissolution of the Soviet Union. More recent landmark events have included the Crimean crisis of 2014 and heightened trade friction between the US and China during Donald Trump’s tenure in the White House.

The climate has heated up further over the past two years in the wake of Russia’s invasion of Ukraine in 2022 and the Hamas incursions into Israel in October last year. NATO strategists and international relations experts are increasingly voicing fears that Vladimir Putin won’t stop with Ukraine should his military campaign be successful, and other former Soviet states may also be at risk.

Meanwhile, the situation in the Middle East is increasingly volatile, with Israel continuing to wage an internationally unpopular war in Gaza and Houthi attacks disrupting shipping in the Red Sea. Iran and Israel just recently launched drone and missile attacks on each other’s sovereign territory for the first time.

In a provocative column, Bloomberg’s Niall Ferguson argues that the world has entered a second cold war, with a fragmented Western world and a three-way authoritarian axis comprising Iran, Russia, and China as the protagonists. This time, it is China rather than Russia at the head of an “anti-hegemonic coalition.”

Right now, it is difficult to anticipate how this New Cold War will play out. Ferguson believes that China is currently using illiberal countries such as Russia, Iran, North Korea, and Venezuela as proxies in its contest with the West. But if and when would it dare to test Western resolve by invading or blockading Taiwan?

Much will depend on what happens in the US elections – a contest between Trump with his isolationist instincts and indifference to Ukraine, and Joe Biden’s tendency to seek détente with America’s foes. Trump’s unpredictability – he was tougher on China and Iran than Biden – could deter the new axis more effectively than Biden’s return to the White House, according to Ferguson.

How this might all play out is difficult to call. Cool heads may yet prevail, given that China and the West are much more economically interdependent than they were in the Cold War of the 20^th century. But unless the geopolitical system moves towards levels of equilibrium, investors can expect the following in the short term:

• Safe havens such as gold and the US dollar will see inflows during times when the geopolitical landscape is unstable. Conversely, many emerging markets may experience currency declines.
• Supply chain disruptions and higher oil prices will keep inflation elevated.
• Equities will be volatile, often moving up and down in exaggerated ways depending on risk perceptions at any given time.

Although geopolitical risks are at 33-year highs, it is the direction of interest rates, inflation, and the US economy that are having a larger impact on equity and bond market performances, as evidenced in 2023.

It is through a defendable, dynamic approach that Dynasty’s core portfolios are relatively well positioned against heightened geopolitical risks with the key characteristics as summarised below:

• Equity holdings – other than in SA – being almost exclusively developed-market listed.
• Quality, global, non-cyclical companies forming the core of our offshore equity exposure.
• An aversion to longer-dated US treasuries, with holdings in short-duration corporate credit and dollar cash to exploit an exceptional opportunity where inflation-plus returns can be achieved at lower risk.
• A direct exposure to gold via an ETF in our domestic multi-asset class fund.
• A virtual absence of long-duration SA bonds in our domestic portfolio.

The above features should provide our investors with a degree of comfort as the temperature rises further in this New Cold War!

 

“When a geopolitical risk arise, our natural tendency is to immediately become foreign policy experts, and also believe that we can confidently link complex and imponderable political situations to financial market outcomes. It is hard to overstate quite how difficult this is.” 

– Joe Wiggins, Financial Author

“We have dealt with inflation before, we dealt with deficits before, we have dealt with recessions before, and we haven’t really seen something like this pretty much since World War II.”  

– Jamie Dimon, CEO JPMorgan Chase

 

Global News

• US economic growth slid to an almost two-year low last quarter at 1.6% year-on-year, while inflation jumped to uncomfortable levels, interrupting a run of strong demand and muted price pressures that had fuelled optimism for a soft landing. Personal spending gained 2.5%, lower than forecast. Underlying inflation advanced at more than 3.7%, the first quarterly acceleration in a year. Wall Street was rattled, and the S&P 500 extended its April slide.
• A strong dollar is back and looks set to stay as investors have been forced to rethink its trajectory because of sticky inflation that may mean the Fed will hold off on cutting interest rates. A Bloomberg dollar index has gained more than 4% this year, reflecting advances against all major developed and emerging-market counterparts. The currency still stands as the ultimate currency haven.
• President Joe Biden has recently lost ground in key battleground states over pessimism about the trajectory of the US economy. The April Bloomberg News/Morning Consult poll found Biden is ahead in just one of the seven states most likely to determine the outcome of his matchup with Donald Trump, leading Michigan by 2 percentage points. Biden trails Trump slightly in Pennsylvania and Wisconsin, and his deficits in Georgia, Arizona, Nevada, and North Carolina are larger.
• The Bank of Japan held interest rates steady and simplified its language on bond-buying, an outcome that prompted the yen to set a fresh 34-year low of 154.88 against the dollar amid ongoing concerns of possible currency intervention. Japan is on the brink of such an intervention if the yen weakens any further, according to Mitsuhiro Furusawa, former vice minister of finance for international affairs.
• Analysts now believe China’s economy could grow at 4.8%, up from a previous expectation of 4.6%. This comes after a better-than-expected performance in the first quarter. However, a Bloomberg survey of economists sees more signs that the world’s second-biggest economy will struggle to escape from deflationary pressures. The government’s expansion target is 5%.
• Global electric vehicle sales are set to rise by more than a fifth to reach 17 million in 2024, driven by China, according to the International Energy Agency. It expects half of all cars sold globally to be electric by 2035, up from more than one in five this year, provided charging infrastructure keeps pace. The IEA includes battery electric vehicles and plug-in hybrid vehicles in its definition of EVs.
• US President Joe Biden has signed a Bill into law that could lead to a nationwide TikTok ban, escalating a massive threat to the company’s US operations. The legislation poses the most serious risk to TikTok since US officials began raising concerns about the app in 2020. Under what is now US law, TikTok is forced to find a new owner within months or be banned from the United States entirely.
• Facebook owner Meta saw its shares drop as much as 19% in after-hours trade on Wednesday after it forecast weaker-than-expected sales in the current quarter while targeting higher capital expenditures. The disappointing results raised questions about returns on those investments and whether expectations for the other Big Tech peers were too high.
• However, on Thursday, Microsoft, and Google owner Alphabet trounced Wall Street estimates with their latest quarterly results, lifted by a surge in cloud revenue – fuelled in part by booming use of AI services. This showed investors that spending on AI was paying off. Alphabet gained as much as 17% and Microsoft 6.3%.
• Huawei is on the verge of overtaking Apple in the world’s largest smartphone market, China. Huawei saw 70% year-on-year growth in its smartphone sales in China in the first quarter, while Apple’s sales declined by more than 19%, according to Counterpoint Research. Apple now has a market share of 15.7%, while Huawei’s has jumped to 15.5%, from 9.3% last year.
• Sales of Ford Motor trucks and other commercial vehicles led the automaker to beat Wall Street’s earnings estimates for the first quarter, offsetting losses of its electric vehicles, with that unit reporting losses of more than $1.3 billion. It maintained its 2024 earnings guidance of adjusted earnings before interest and taxes, or EBIT, of between $10 billion and $12 billion.
• Tesla’s first quarter profits slumped by more than half to $1.13 billion, while revenue was $21.3 billion, below analysts’ predictions of just over $22 billion. The company has suffered from falling demand and competition from cheaper Chinese imports which has led its stock price to collapse by 43% in 2024 so far. However, its shares gained 14% on Wednesday after it said it will be making cheaper cars.
• As at Thursday’s close the S&P 500 was 1.6% up for the week.

 

Local News

• Political scientist RW Johnson says the opinion polls published in South Africa’s election run-up concur on one thing, that this is a period of unprecedented political change, and we are heading for the showdown of showdowns. The business community is exerting maximum pressure against any idea of an ANC deal with the MK or EFF. It has placed its entire weight behind the notion of an ANC-DA coalition. If the ANC is forced to share power, it will be historic – painful at first perhaps, but fundamentally good according to John Micklethwait, editor-in-chief of Bloomberg News.
• Meanwhile, the EFF and MK party are willing to work together and could meet to discuss a formal arrangement after the May 29 general election. The ANC is against a tie-up with the EFF, according to party sources, although it could join forces with the IFP or a group of smaller parties if the ANC’s support does not slip below about 45%. (We have stated previously that an ANC-EFF election outcome isn’t priced into the currency and should this materialise, it would cause the rand to fall considerably.)
• Commentator Stephen Grootes has taken an in-depth look at MK’s manifesto. He says it is probably the most radical assemblage of promises of any party likely to win a significant share of the vote in the upcoming general election. “It promises to literally remove the Constitution and to dramatically increase the role of the state in the economy. It is incendiary, perhaps deliberately so.” You can read his analysis here.
• President Cyril Ramaphosa has vowed to end “health-care apartheid” by signing off the National Health Insurance Bill, which he says will equalise health care. Parliament’s National Council of Provinces approved the bill in December and referred it to the president. He didn’t indicate when he would sign the Bill.
• Meanwhile, Deputy President Paul Mashatile and Justice Minister Ronald Lamola travelled to the UAE this week to secure its cooperation in the matter of the impasse with the Emirates over what it described as the Gulf nation’s lack of “willingness” to help extradite Atul and Rajesh Gupta, who are wanted on charges of money laundering and fraud.
• Eskom chairman Mteto Nyati says the current lifting of loadshedding has nothing to do with political pressure being applied to the power utility ahead of the 29 May election. He said Eskom’s ability to keep the lights on is the result of progress made in its maintenance strategy that it began implementing over a year ago – and certainly not because it is running its power stations too hard. The central bank has lifted its growth forecast for this year on the back of lower levels of power outages.
• Although inflation is now back within the South African Reserve Bank’s 3% to 6% target band, having stayed there since June last year, it has actually hovered well above the 4.5% midpoint, which is where the SARB prefers to anchor expectations. This suggests that the path back to the 4.5% midpoint of the target band is likely to be “bumpy and protracted,” the central bank said in its six-monthly Monetary Policy Review. As a result, the interest rate may remain unchanged or near its 14-year high of 8.25% this year.
• The South African Reserve Bank has developed two new measures to better understand underlying price pressures, and both currently show elevated readings. A supercore measure plus a gauge dubbed the “persistent and common component of inflation” will be used alongside headline and core price growth published by Statistics South Africa as additional tools to inform monetary policy. Risks to underlying inflation include price growth expectations, the normalisation of health insurance and rental housing inflation, and currency weakness, the report said.
• Municipalities that owe Eskom millions are unsurprisingly battling to stick to the conditions set by the National Treasury as part of a debt relief programme. The South African Local Government Association, municipalities, and government departments have been looking for solutions to municipalities’ ballooning debt to Eskom for years. SALGA has urged the government to be patient with municipalities.
• Foreigners are still taking advantage of the cheap rand to buy trophy homes, especially in the Western Cape, at a fraction of the cost of high-end global properties.  The Western Cape, especially Cape Town, is the biggest beneficiary. Last year a Russian buyer paid R150 million for a Clifton mansion, the highest price paid for a residential property in 2023. Since 2019, sales with prices of more than R20 million have nearly doubled while the total sales value has surged by 120% – from R1.46 billion to R3.23 billion.
• The Financial Sector Conduct Authority has approved 75 institutions to be licensed as crypto asset service providers. The full list, including the likes of Peresec, Unum Capital and Luno, authorises a range of entities to provide crypto services across three main authorised activities: advice, intermediary services, and investment management.
• Anglo American has rejected an unsolicited bid of an all-share merger proposal from BHP Group. The proposal was conditional on the company first splitting off its South African platinum and iron ore units. BHP has offered $39 billion. A deal, if successful, could mark a return to large-scale dealmaking for BHP, while other bidders may emerge. A bid that values Anglo at $42.6 billion could be successful, say analysts.
• Sasol’s shares have dropped the most in more than a year, down 11% on Tuesday, after it reported issues throughout its South African operations. Sasol’s synthetic fuels volumes for the quarter missed their estimates, while the upper range of its revised full-year guidance is just below Morgan Stanley’s projection of 7.15 million tons. Over the past five years, shares have lost 72% of their value.
• Forbes has recognised TymeBank as South Africa’s top bank in its 2024 list of the world’s best banks. This adds to its recent accolade of winning the News24 Bank of the Year award in March. Notably, both awards consider customer service in their assessment.
• As at the time of writing the rand was 2% stronger and the ALSI was 2.6% up for the week.

 

 

Sources: Dynasty, BusinessLIVE, FM, Moneyweb, News24, Bloomberg, Reuters, CNN, BBC, Daily Maverick, BizNews.com, etc.