US Election 2024: Potential Effects of a Trump Win on South African Financial Markets

Key takeaways:

1. Rand Weakening and Export Competitiveness: A Trump victory could weaken the rand due to "America First" policies, making imports more expensive but potentially boosting competitiveness for South African exporters.
2. Trade Tensions and Market Diversification: Increased trade tensions and potential tariffs may challenge South African exports to the US, prompting a need for diversification into other export markets.
3. Shift in Investor Sentiment: Investor focus on US assets might reduce foreign investment flows to South Africa and raise the cost of capital, making domestic investment more crucial.
4. Impact on Energy Markets: Trump's support for fossil fuels could benefit South African coal exports but negatively impact renewable energy markets, affecting companies involved in these sectors.
5. Increased JSE Volatility and Interest Rate Changes: The JSE could see heightened volatility due to global trade uncertainties, benefiting defensive sectors like consumer staples. Higher US interest rates due to potential inflationary policies might increase borrowing costs but improve net interest margins for South African banks.

US Election 2024: How a Trump Victory Could Shape South African Financial Markets

Donald Trump Victory

1. Currency Fluctuations

Likely result: Potential weakening of the rand

Rationale: Trump's "America First" policies and unpredictable approach to international relations could increase global economic uncertainty, pressuring emerging market currencies.

Consequences of a weaker rand could include:

• More expensive imports, potentially driving up inflation

• Improved competitiveness for South African exporters

• Increased volatility in currency markets, complicating financial planning for businesses

The above table highlights Reuters polling data from banking analysts aggregated to arrive at price targets for the USD/ZAR.

Several South African companies can benefit from a weaker rand, particularly those that are export-oriented or have significant foreign earnings these include:

1. Mining companies who sell their commodities in US dollars while their costs are largely in rand, so a weaker rand can boost their profits.
2. Export-oriented manufacturers i.e. Sasol, Sappi, Nampak and Mondi
3. Multinational companies with significant overseas operations i.e. Naspers/Prosus, Richemont and British American Tobacco
4. Tourism-related companies i.e. Sun International and City Lodge Hotels
5. Agricultural exporters i.e. Oceana Group, Astral Foods, KAP Industrial

It's important to note that while these companies may benefit from a weaker rand in terms of their export earnings, a persistently weak currency can also have negative effects on the broader economy and potentially impact their domestic operations, and trade relations and tariffs (see below) will be a further consideration.

The table below looks at local miners, broker ratings and price targets as polled by Reuters as of the 22^nd of October 2024.

2. Trade Relations

Likely result: Increased trade tensions, potential tariffs

Rationale: Trump might reinvigorate his stance on protectionist trade policies, potentially affecting South African exports to the US. Possible outcomes include:

• Challenges for South African exporters accessing US markets
• Need for South African businesses to diversify export destinations
• Potential opportunities in import substitution as foreign goods become more expensive

3. Investor Sentiment

Likely result: Possible reduction in investment flows to South Africa

Rationale: Trump's policies might encourage a shift towards US assets, potentially reducing capital flows to emerging markets. This could result in:

• Reduced foreign investment in South African financial markets
• Higher costs of capital for South African businesses and the government
• Increased focus on domestic sources of investment and economic growth

Reduced foreign investment could pressure the broader market, potentially affecting index heavyweights like Richemont or British American Tobacco which are sensitive to global investor sentiment.

4. Commodity Prices

Likely result: Mixed impact, potential boost for traditional energy commodities

Rationale: Trump's support for fossil fuels could benefit South African coal exports, but might negatively impact prices of metals used in renewable technologies. The mining sector might experience:

• Continued demand for traditional energy commodities
• Potential slowdown in the transition to renewable energy technologies
• Need for strategic positioning in a changing global energy landscape

The table below looks at local coal producers, broker ratings and price targets as polled by Reuters as of the 22^nd of October 2024.

5. Foreign Direct Investment (FDI)

Likely result: Potential decrease in US investment in South Africa

Rationale: Trump might encourage US companies to repatriate investments, potentially reducing FDI in emerging markets. Implications could include:

• Reduced inflow of foreign capital and technology
• Increased importance of non-US sources of FDI
• Need for enhanced incentives to attract and retain foreign investment

6. Stock Market Performance

Likely result: Possible volatility in the JSE

Rationale: Uncertainty in global trade and potential shifts in US foreign policy could lead to increased volatility, particularly affecting export-oriented companies. Investors might need to prepare for:

• Increased market volatility
• Potential underperformance of sectors vulnerable to trade tensions
• Opportunities in defensive sectors and companies with strong domestic focus

Defensive sectors like consumer staples could outperform. Companies like Shoprite Holdings or Tiger Brands, with their focus on essential goods and strong domestic presence, might be viewed as safer bets during periods of global uncertainty.

The table below looks at local consumer stocks, broker ratings and price targets as polled by Reuters as of the 22^nd of October 2024.

7. Interest Rates

Likely result: Potential for higher interest rates

Rationale: If Trump pursues inflationary policies or increases the US deficit, it could lead to higher US interest rates, potential consequences include:

• Higher borrowing costs for businesses and consumers
• Increased returns for savers and fixed-income investors
• Potential slowdown in economic growth due to tighter monetary policy

Higher interest rates could ultimately benefit the banking sector, potentially improving net interest margins for banks, although if elevated too much and for too long could also increase credit losses.

The table below looks at local banks, broker ratings and price targets as polled by Reuters as of the 22^nd of October 2024

In conclusion

A Donald Trump victory in the 2024 US presidential election could impact South African financial markets in several ways. The rand might weaken due to Trump's "America First" policies and international relations, making imports more expensive but boosting exporter competitiveness. Trade tensions and potential tariffs could challenge South African exports to the US, necessitating diversification in export markets. Investor sentiment may shift towards US assets, potentially reducing foreign investment flows to South Africa and increasing the cost of capital. While Trump's support for fossil fuels could benefit South African coal exports, it might negatively affect renewable energy markets. A potential decrease in US foreign direct investment could prompt South Africa to seek alternative investment sources. The Johannesburg Stock Exchange (JSE) might experience increased volatility due to global trade uncertainties, affecting export-oriented firms and benefiting defensive sectors like consumer staples. Additionally, inflationary policies could lead to higher US interest rates, impacting borrowing costs and potentially benefiting the banking sector through improved net interest margins.