South Africa exports only 7% of its total goods to the United States, with 40% of these exports comprising precious metals that remain exempt from the new tariffs. The other 60% of our exports to the US will be adversely affected – a manageable, albeit not insignificant, part of the domestic economy.

The tariff announcement was essentially a non-event in the equity market, signalling that investors had already priced in the anticipated impact of tariffs on financial markets. The growth assets and sectors that will undoubtedly face headwinds are those that predominantly rely on export revenues, while those that are not subject to the tariffs may be indirectly affected.

Tariffs are generally expected to be inflationary, but we believe there will be a one-off impact on inflation after which deflation could set in due to the resulting slower growth. Investors in safe-haven assets, like US Treasuries and South African bonds, particularly at the shorter end of the curve, stand to benefit from the tariffs. Slower growth would likely result in central banks easing monetary policy by lowering interest rates - a positive for bond investors.

What the tariffs say about the US agenda

Initially, market analysts thought the Trump administration was going to use the tariffs to pressure countries into making deals favourable to the US—and he did so initially. However, it has since become clear that the US is focusing on two priorities: reshaping trade in the US’s favour and raising revenues to fund the huge fiscal deficit.

We believe tariffs are a poor economic mechanism and that there are more efficient ways to deliver on these, one of which is fiscal tightening. However, given the US’s preference towards using tariffs to achieve these objectives, we expect tariffs to remain at an elevated level for the foreseeable future.

There’s no doubt that the US’s punitive global tariff agenda has meant it has definitely lost its status as a trusted partner, so supply chains will inevitably be rerouted. But the US is still the largest economy, and countries will still want to trade with it. This is reflected in the debatable trade deal the EU negotiated with the US.

South Africa's efforts to expand trade relationships with China, where duty-free access has been secured for multiple fruit varieties, and partnerships across Asia and the Middle East, demonstrate the potential for a shift in trade relations away from the US.

The government's Export Support Desk and various competitiveness programs provide practical mechanisms for affected companies to pivot toward alternative markets. These initiatives, combined with natural market forces, suggest that the economy will ultimately adapt to the change in the trade landscape.

The inflationary impact of tariffs

Perhaps the most misunderstood aspect of the current tariff environment is its likely impact on inflation. Conventional wisdom suggests that tariffs will drive prices higher, but historical evidence points to a different reality.

During the Great Depression, various trade restrictions in the 1960s and 1970s and the Trump administration's first-term tariffs consistently slowed economic growth without triggering sustained inflation.

Tariffs create trade frictions that primarily reduce global efficiency and slow economic growth. Thus, the deflationary pressure from muted growth prospects typically outweighs any short-term price level upward adjustments. For South Africa, this means that while some sectors may face immediate pressure, the broader macroeconomic environment may benefit from monetary policy easing that ultimately stimulates the economy.

From an investment point of view, growth assets, particularly those already expensively priced like US equities, could face strong headwinds as global trade frictions mount. However, this creates compelling opportunities in defensive assets.

South African government bonds, particularly those with maturities up to seven years, would present exceptional value in this environment. The combination of high real yields, which are among the most attractive globally, and the potential for further interest rate cuts as inflation trends lower, positions these instruments as both defensive plays and total return opportunities. The possibility of a new 3% inflation target further enhances their appeal.

Haven assets like US Treasuries also benefit from trade uncertainty, as investors seek quality amid growth concerns. This flight-to-quality dynamic supports bond prices relative to growth assets.

Sector-specific vulnerabilities and opportunities

The tariff impact will vary significantly across sectors. South Africa's metals and mining companies remain largely unaffected, benefiting from their exemption from tariffs and their outward-focused business models. Companies like Naspers, with limited local economy exposure, are also in a position to weather the storm well.

The banking sector faces a more complex challenge. As institutions heavily geared toward local growth with minimal export earnings, banks would not benefit from rand weakness and would be vulnerable to any prolonged domestic growth slowdown.

However, this vulnerability is a longer-term risk rather than an immediate threat, particularly given the limited scope of direct tariff exposure.

Agricultural sectors face immediate pressure, but even here, the impact may be manageable. Some producers, particularly in avocados, remain confident they can compete despite the 30% tariff, aided by favourable exchange rates.

A manageable challenge

We believe South Africa's US tariff challenge, as it stands, is thus surmountable. The limited direct exposure, combined with still strong domestic fundamentals, creates a foundation for resilience. The deflationary rather than inflationary impact of tariffs opens space for supportive monetary policy, while high-quality bonds offer compelling opportunities in an uncertain global environment.

Rather than posing an existential threat, these tariffs might stimulate positive economic restructuring while offering attractive entry points for patient investors. The key lies in maintaining perspective on the actual extent of investors’ exposure while capitalising on the opportunities that market overreactions inevitably present.

 

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