GNU Fiasco and Vat, and then it's about Deficits, not Tariffs

GNU Fiasco and Vat, and then it’s about Deficits, not Tariffs

What a day we had on Wednesday! First, the GNU fiasco around the Budget approval, and then this all being dwarfed by the further US Tariffs introduced.

Below is an initial note from our Old Mutual Private Clients team.

Everyone globally is analysing, and different opinions will emerge in the coming days. Furthermore, we need to give the most chance to digest over the weekend.

The bottom line - it's a huge event with many impact scenarios. This is never a time to panic - our client portfolios are well diversified and positioned.

They can take pain, as any equities can take pain, though. It is a reminder that long-term returns are always made up of a few really good years, interspersed with bad and boring ones. One has to sit through the latter to benefit from the former.

The good news is that valuations are still reasonable across domestic asset classes, which together with improvements in economic fundamentals, bode well for future returns.

If need be, we will make incremental changes, but no major shifts are expected.

OM Private Clients on the Trump Tariffs

Well, that did not go as expected. President Trump’s tariff “liberation day” exceeded expectations. What is now crystal clear is that this is not about reciprocal tariffs and eliminating tariff differentials - it is about eliminating the US trade deficit. The message is simple: if you want to continue to do business with the US, help build its manufacturing capacity. In effect, Trump wants foreign capital to build America. We are not convinced that this will materialise as intended.

The graph below highlights, from an SA perspective, how the US administration arrived at the so-called 60% tariff rate (including currency manipulation and trade barriers) levied on US imports. According to the Office of the United States Trade Representative, total goods traded with South Africa in 2024 was US$20.5bn. The US exported US$5.8bn to SA and imported US$14.7bn from SA. This results in a trade deficit of US$8.9bn. SA is therefore deemed to have trade barriers equating to 60%, given that US$8.9bn is 60% of the total value of imports at US$14.7bn. Trump claims to kindly give a 50% discount on this rate, arriving at the announced 30% tariff on SA imports going forward.

This is nowhere near the actual tariff that SA charges on imports from the US, including other trade barriers and currency manipulation, as claimed. Given that tariffs are placed on product lines as opposed to countries, it is very difficult to calculate what the exact average tariff is that SA places on imports from the US.

However, depending on the source, estimates range from 4.4% to 7.1%, taking into account that both countries fall under the World Trade Organisation’s most favoured nation rates.

Graph 1: How the US arrived at their announced tariffs

Source: South Africa | United States Trade Representative

The underlying issue is that the US manufactures a small number of goods relative to the size of its economy. America is a wealthy nation, with high levels of consumption, and is predominantly a service-based economy. As a result, they have few comparative advantages when it comes to global manufacturing given their high labour force cost base. They therefore have to import a large number of goods.

Raising tariffs to extreme levels may encourage some companies to relocate production to the US, but it won’t change these fundamental realities. Graph 2 highlights that current tariff levels in the US are at their highest since World War II, and with the communicated tariffs coming into effect on 9 April, the average tariff is expected to rise well beyond 10%.

Graph 2: How the US arrived at their announced tariffs

Source: Trump Tariffs: The Economic Impact of the Trump Trade War

Given this backdrop, the question of whether to negotiate with Washington or not is almost irrelevant. This is about deficits and not about tariffs.

Therefore, it is very hard to see how US demands can be met given that they are premised on the fact that trade surpluses and deficits should not exist. This level of ideology is a massive leap away from reality.

Learning the lesson from China post 2018, one can see countries and companies alike becoming less reliant on the US for customers and rather looking for alternative trading partners. As a result, US trade volumes are likely to shrink, while the cost of imported goods will rise, hurting American consumers.

So, what are the investment implications? Markets will react negatively, fearing a US recession and slower global growth. Trade tensions will fuel volatility, while higher prices on tariffed goods could stoke inflation. However, our base view of lower inflation remains unchanged. The fear of rising prices in the US is likely to keep the Federal Reserve on hold for the time being, however, weaker economic data may cause them to lower rates in the not-too-distant future. Theory tells us that the US dollar will likely rise in the short term, partially negating the impact of tariffs. However, lower US yields will place downward pressure on the relative strength of the US dollar going forward. Equity market volatility is likely to remain for some time, as markets figure out the full extent of the impact of the announced tariffs. The US market is more vulnerable given higher valuations than the rest of the world.

From a long-term investor’s perspective, periods like these are the cost of participating in long-term market growth. It is going to be a bumpy ride, but as always, this is not a time to become emotional.

Impact of Trade Tariffs of the Previous Trump Presidency | Planner View

The previous Trump Presidency also saw far more hard trade tariffs introduced in late 2018. We then saw a sharp, immediate negative reaction to markets in anticipation of weaker global growth.

While this did take place, the weaker stock markets were relatively short lived, where the 4^th quarter market weakness saw most global markets -10% down in the 4^th quarter of 2018 - is but a mere blip on the longer-term graph of the world stock markets as a whole (MSCI World Index) today;

This article, written a good two years after the fact, looks at the overall net results of these tariffs introduced back then, and who were the winners and losers of the tariffs then.

More pain than gain: How the US-China trade war hurt America

I do believe that many of these past lessons may very well occur again.

Is this the Start of the BIG Rotation?

We're currently witnessing the longest period of US equity relative outperformance in history. However, there's a cycle to everything, and international diversification is perhaps more important today than ever before.  

Furthermore, Bank of America Global Research (in their recent Global Fund Manager Survey) view US equities as overvalued, the most since at least April 2001;

Investors in turn have slashed holdings of US equities by the most on record, with fund managers reporting a 23% underweight in US stocks... a plunge of 40 percentage points from the previous survey. It’s a dramatic shift that shows how quickly traders have ditched their optimism about American markets with the S&P 500 tumbling some 8% from an all-time high in February;

Our Views

Our view, “the current US S&P 500 decline marks the 30^th drawdown of more than 5% since the Index’s March 2009 low. And while each time, some predicted a catastrophic sell-off, all 29 previous pullbacks proved to be great buying opportunities. Over the past 16 years, the S&P 500 has delivered around 16% per annum, despite these periodic declines”.

Right now, despite all the market jitters in the US, we believe that the correction is nothing more than that, within the current growth cycle.   

Our sense is that the current US pullback seems to be a recalibration of the US economic outlook from “exceptional” to “ordinary” – and not from growth to recession.

The Ninety One Global Franchise Fund, a Day Before Tomorrow’s 2Oceans 56km Ultra Marathon  

Good Luck to all the Two Oceans runners this weekend! I’m missing out this weekend and going to my wife’s cousin’s wedding in Franschoek. Our little boy Peter is ready for action.

The Ninety One Global Franchise Fund is available as a stand-alone fund, as well as having been a long-term core holding in our offshore allocations in both our discretionary managed PWM solutions and our discretionary managed SIS solutions. It comprises a concentrated portfolio of 26 offshore shares with little to no benchmark bias.  

The Ninety One Global Franchise Fund, having zero Magnificent 7 exposure and therefore neatly outperforming the US S&P market this year-to-date by roughly 7% to the end of March, Ninety One use a running analogy to highlight the importance of sticking to one’s convictions;

“Imagine you’re running a marathon. The gun goes off, adrenaline surges, and the first few miles fly by – your training has paid off, the pace feels easy, and conditions seem ideal. Then the terrain shifts. A hill appears, the wind picks up, and suddenly the race feels very different. This is where preparation matters – where those who pace themselves start to pull ahead.

Investing in today’s market feels much the same. For years, low interest rates and steady growth made for a predictable course. But in March 2025, the S&P 500 entered a technical correction, falling from its recent peak. Escalating trade tensions, rising tariffs, and shifting economic conditions disrupted the rhythm. For rate-sensitive sectors like tech, the race has become especially tough.

Some investors are flagging, questioning their strategy. Others, who stayed disciplined and diversified, are still running strong.

The key to finishing a marathon isn’t the fastest mile – it’s managing energy, adapting to the course, and keeping your eyes on the long game. The Ninety One Global Franchise Fund doesn’t try to predict short-term moves – we prepare for them.

We build a diversified portfolio that balances defense, durability, and growth. Defensive names provide resilience, durable compounders offer steady returns, and growth businesses capture structural tailwinds. Together, they create a portfolio built not just to weather volatility, but to compound through it.

The Fund continues to offer long-term growth and real wealth creation – delivering after-fee returns of 1.8% per annum ahead of the market since inception 18 years ago, providing meaningful diversification for South African investors”.

FRIDAY FUNNY