Blue Chip Issue 96

BLUE CHIP INVESTMENT |

BLUE CHIP INVESTMENT | Economy The clock is ticking on Trump’s red sweep United States President Donald Trump wasted no time in implementing the sweeping policy changes he promised in his campaign with his numerous executive orders sending shockwaves through global markets. Trump’s ability to make unilateral decisions may come to an end sooner than he would like as his Republican “red sweep” - control of the presidency, Senate and House - may be in jeopardy with the 2026 midterm elections in view. Ironically, his “Make America Great Again” policies may be working against him as they are having a direct, negative impact on his voter base. • Tariffs and recession fears. On 2 April, Trump announced tariffs - ranging from 10% to 50% - on all United States (US) trading partners. This “Liberation Day” move triggered global market panic and recession fears. A temporary 90-day hiatus eased concerns slightly, but on 9 July, Trump resumed his war on trade and has raised fears of increased prices and inflation directly impacting US consumers. • Federal job cuts. In his desire to make the federal government more efficient, 2.4-million federal workers were impacted by job cuts, buy-outs and other planned reductions; many of which were held by his own supporters, further damaging his political standing. • Foreign military involvement. Despite Trump’s campaign promises to not fight other countries’ wars, Trump ordered strikes on Iran’s nuclear facilities during the Israel-Iran conflict, which sparked a backlash about Trump bypassing Congress on the decision. • Controversial tax bill. Trump’s “One Big Beautiful Bill Act”, which promised massive tax cuts, has drawn criticism for potentially increasing the US deficit by .3-trillion over the next decade, a move his critics say the US cannot afford. • Disproportionate impact on the poor. Analysis shows Trump’s tax reforms will benefit the wealthiest while hurting lowerincome Americans - especially through cuts to medical and food aid - potentially alienating working-class supporters. Markets: from panic to perspective While markets initially responded to Trump’s unpredictability with extreme volatility, they have started to understand that his style is unpredictable and are now focusing on the broader, long-term implications of his policies. Following the April tariff announcement, markets predicted a global recession. However, with the announcement of a 90-day pause in implementing these tariffs, along with some high-profile trade talks, institutions like the World Bank, International Monetary Fund and the Organisation for Economic Cooperation and Development (OECD) now predict a slowdown in global growth, but not a fullblown recession. The US, however, will bear the brunt of any tariff-induced inflation. The US Federal Reserve (Fed) finds itself in a tricky position. It is unwilling to cut rates meaningfully due to ongoing sticky inflation, but Trump is pressuring the Central Bank to cut rates to boost US growth, which the OECD has predicted will fall by 80 basis points this year. Compared to the first half of 2025, the global economic outlook has improved. Europe’s defence spending lifts confidence Trump’s policy on not getting involved in global disputes saw the European Union (EU) announce historic defence spending increases - especially in Germany - amid fears the US will no longer protect its allies. EU countries are targeting 5% of gross domestic product (GDP) for defence, aligning with rising military investments by China and Russia. This move has boosted EU business confidence and buoyed EU equity markets, particularly defence stocks. However, since the spending is not focused on productivity-enhancing infrastructure, it’s unlikely to offer long-term economic benefit. Structural issues like ageing populations and low productivity continue to limit EU growth potential, which is expected to remain under 1.5% for the foreseeable future. 28 www.bluechipdigital.co.za

INVESTMENT | Economy BLUE CHIP Global outlook: brighter in second half of 2025 Compared to the first half of 2025, the global economic outlook has improved. While the world’s growth will remain below full capacity in the short term due to US tariffs, Citadel Asset Management believes the world will avoid recession and reach a new equilibrium as countries find new trading partners. We expect the global economy to recalibrate, returning to capacity growth - around 2.5% - within three to five years. We do, however, believe that the US will contribute less to global growth going forward, with emerging Asia picking up the slack emanating from Trump’s policies. Trump’s ability to make unilateral decisions may come to an end sooner than he would like. Local outlook: slow improvement possible Despite diplomatic tensions between South Africa and the US, Trump invited South African President Cyril Ramaphosa to the White House with initial trade talks taking place. Despite these discussions, South Africa still faces a 30% tariff as of 1 August, with a potential 10% additional levy for being a member of the BRICS (Brazil, Russia, India, China and South Africa) economic bloc. South Africa is, however, still hoping to negotiate duty-free access for key exports including agricultural products and vehicles. But South Africa faces bigger problems than Trump’s tariffs: • Lack of investment. Fixed investment as a share of GDP has fallen from 22% in 2008 to 13% today, well below emerging market peers like Korea and India. This hampers the country’s growth capacity. • Not business friendly. South Africa ranks poorly in OECD comparisons of business regulations, making starting up a business in the country incredibly onerous, this in conjunction with dysfunctional ports, unreliable electricity supply and visa issues. All of which make it difficult for South Africa to attract investment. • Government of National Unity (GNU) on shaky ground. The GNU must start acting cohesively if it wants to rebuild investor confidence and resolve structural constraints. • Strong international trade partnerships needed. Strengthening global trade ties is crucial. Broader global engagement, through trade, will attract the foreign direct investment needed to kickstart economic growth. • Government finances have dried up. With debt-to-GDP at about 80% and debt servicing costs taking up 20% of the budget, government spending power is limited. The private sector will have to start playing a bigger role in investment. Local companies have cash on hand but unlocking it will require policy certainty and reform. • Sector imbalances. Although the South African agriculture sector has supported the country’s growth in the first half of 2025, it contributes just 3% to GDP and cannot sustain the economy alone. Key sectors like construction, mining and manufacturing remain weak, constrained by structural issues. Stable inflation locally Encouragingly, South African inflation is below 3%, making room for interest rate cuts. However, the South African Reserve Bank (SARB) is considering a lower inflation target of 3%. While this move could initially see the SARB slow rate cuts in the near term, over time, this will help lower inflation expectations and create a more stable rate environment. Local economic growth expected to be slow We expect South Africa’s growth to stay below 1% over the next 12 to 18 months. If structural reforms are implemented and the GNU remains stable, it could rise to 2% within two to three years. However, longer-term performance will depend on political stability and reform continuity post-2027 - when the African National Congress is set to have its national elective conference. The global environment is volatile At Citadel Asset Management, our role is to mitigate against investment risks, while seeking optimal growth opportunities. We achieve this by remaining vigilant, prudent in our investment decisions and focused on the long term. Discover more at citadel.co.za. Maarten Ackerman, Chief Economist, Citadel Asset Management www.bluechipdigital.co.za 29