Blue Chip Issue 96

BLUECHIPINVESTMENT |

BLUECHIPINVESTMENT | EconomyThe clock is ticking on Trump’sred sweepUnited States President Donald Trump wasted no time in implementing the sweeping policy changes hepromised in his campaign with his numerous executive orders sending shockwaves through global markets.Trump’s ability to make unilateral decisions may come toan end sooner than he would like as his Republican “redsweep” – control of the presidency, Senate and House – maybe in jeopardy with the 2026 midterm elections in view.Ironically, his “Make America Great Again” policies may be workingagainst him as they are having a direct, negative impact on hisvoter base.• Tariffs and recession fears. On 2 April, Trump announced tariffs– ranging from 10% to 50% – on all United States (US) tradingpartners. This “Liberation Day” move triggered global marketpanic and recession fears. A temporary 90-day hiatus easedconcerns slightly, but on 9 July, Trump resumed his war on tradeand has raised fears of increased prices and inflation directlyimpacting US consumers.• Federal job cuts. In his desire to make the federal governmentmore efficient, 2.4-million federal workers were impacted byjob cuts, buy-outs and other planned reductions; many ofwhich were held by his own supporters, further damaging hispolitical standing.• Foreign military involvement. Despite Trump’s campaign promisesto not fight other countries’ wars, Trump ordered strikes on Iran’snuclear facilities during the Israel-Iran conflict, which sparked abacklash about Trump bypassing Congress on the decision.• Controversial tax bill. Trump’s “One Big Beautiful Bill Act”, whichpromised massive tax cuts, has drawn criticism for potentiallyincreasing the US deficit by .3-trillion over the next decade, amove his critics say the US cannot afford.• Disproportionate impact on the poor. Analysis shows Trump’stax reforms will benefit the wealthiest while hurting lowerincomeAmericans – especially through cuts to medical and foodaid – potentially alienating working-class supporters.Markets: from panic to perspectiveWhile markets initially responded to Trump’s unpredictability withextreme volatility, they have started to understand that his styleis unpredictable and are now focusing on the broader, long-termimplications of his policies.Following the April tariff announcement, markets predicted aglobal recession. However, with the announcement of a 90-day pausein implementing these tariffs, along with some high-profile tradetalks, institutions like the World Bank, International Monetary Fundand the Organisation for Economic Cooperation and Development(OECD) now predict a slowdown in global growth, but not a fullblownrecession.The US, however, will bear the brunt of any tariff-induced inflation.The US Federal Reserve (Fed) finds itself in a tricky position. It isunwilling to cut rates meaningfully due to ongoing sticky inflation,but Trump is pressuring the Central Bank to cut rates to boost USgrowth, which the OECD has predicted will fall by 80 basis pointsthis year.Compared to the first half of2025, the global economicoutlook has improved.Europe’s defence spending lifts confidenceTrump’s policy on not getting involved in global disputes saw theEuropean Union (EU) announce historic defence spending increases– especially in Germany – amid fears the US will no longer protect itsallies. EU countries are targeting 5% of gross domestic product (GDP)for defence, aligning with rising military investments by China andRussia. This move has boosted EU business confidence and buoyedEU equity markets, particularly defence stocks. However, since thespending is not focused on productivity-enhancing infrastructure,it’s unlikely to offer long-term economic benefit. Structural issueslike ageing populations and low productivity continue to limit EUgrowth potential, which is expected to remain under 1.5% for theforeseeable future.28 www.bluechipdigital.co.za

INVESTMENT | EconomyBLUECHIPGlobal outlook: brighter in second half of 2025Compared to the first half of 2025, the global economic outlook hasimproved. While the world’s growth will remain below full capacityin the short term due to US tariffs, Citadel Asset Managementbelieves the world will avoid recession and reach a new equilibriumas countries find new trading partners.We expect the global economy to recalibrate, returning tocapacity growth – around 2.5% – within three to five years. We do,however, believe that the US will contribute less to global growthgoing forward, with emerging Asia picking up the slack emanatingfrom Trump’s policies.Trump’s ability to make unilateraldecisions may come to an endsooner than he would like.Local outlook: slow improvement possibleDespite diplomatic tensions between South Africa and the US,Trump invited South African President Cyril Ramaphosa to theWhite House with initial trade talks taking place. Despite thesediscussions, South Africa still faces a 30% tariff as of 1 August, witha potential 10% additional levy for being a member of the BRICS(Brazil, Russia, India, China and South Africa) economic bloc. SouthAfrica is, however, still hoping to negotiate duty-free access for keyexports 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 hasfallen from 22% in 2008 to 13% today, well below emergingmarket peers like Korea and India. This hampers the country’sgrowth capacity.• Not business friendly. South Africa ranks poorly in OECDcomparisons of business regulations, making starting up abusiness in the country incredibly onerous, this in conjunctionwith dysfunctional ports, unreliable electricity supply and visaissues. All of which make it difficult for South Africa to attractinvestment.• Government of National Unity (GNU) on shaky ground. TheGNU must start acting cohesively if it wants to rebuild investorconfidence and resolve structural constraints.• Strong international trade partnerships needed. Strengtheningglobal trade ties is crucial. Broader global engagement, throughtrade, will attract the foreign direct investment needed tokickstart economic growth.• Government finances have dried up. With debt-to-GDP atabout 80% and debt servicing costs taking up 20% of thebudget, government spending power is limited. The privatesector will have to start playing a bigger role in investment.Local companies have cash on hand but unlocking it will requirepolicy certainty and reform.• Sector imbalances. Although the South African agriculturesector has supported the country’s growth in the first half of2025, it contributes just 3% to GDP and cannot sustain the economyalone. Key sectors like construction, mining and manufacturingremain weak, constrained by structural issues.Stable inflation locallyEncouragingly, South African inflation is below 3%, making roomfor interest rate cuts. However, the South African Reserve Bank(SARB) is considering a lower inflation target of 3%. While thismove could initially see the SARB slow rate cuts in the near term,over time, this will help lower inflation expectations and create amore stable rate environment.Local economic growth expected to be slowWe expect South Africa’s growth to stay below 1% over the next12 to 18 months. If structural reforms are implemented and theGNU remains stable, it could rise to 2% within two to three years.However, longer-term performance will depend on political stabilityand reform continuity post-2027 – when the African NationalCongress is set to have its national elective conference.The global environment is volatileAt Citadel Asset Management, our role is to mitigate againstinvestment risks, while seeking optimal growth opportunities.We achieve this by remaining vigilant, prudent in our investmentdecisions and focused on the long term.Discover more at citadel.co.za. Maarten Ackerman, Chief Economist,Citadel Asset Managementwww.bluechipdigital.co.za29