As superpower rivalries reshape global growth, investors are urged to diversify portfolios. This was one of the messages on Day 1 of Allan Gray’s retirement benefits seminar, Through the Noise, where Thalia Petousis, portfolio manager at Allan Gray, and Isaah Mhlanga, chief economist and head of Global Market Research at RMB, set the contextual scene for the conference by discussing the economic outlook. Both Petousis and Mhlanga agreed that South Africa needs to carefully consider how it positions itself as the geopolitical landscape continues to shift.
Escalating tensions between global superpowers are fracturing nations and deepening global economic risk. Consequences for South Africa could include pressure on local industries and job losses. Some reform green shoots are emerging in the energy and rail sectors, creating the potential for economic growth, but these could take several years to materialise. In the interim, South Africa may sustain heavy blows in key exporting areas of the economy, subject to higher tariffs. Against this, a well-diversified portfolio is key to protecting investors’ retirement assets and wealth.
US-China tensions, the rise and demise of superpowers, and the fallout for SA
Mhlanga said that South Africa is already seeing the consequences of trade tensions and higher tariffs, with China redirecting exports to ex-US markets like South Africa, especially in sectors such as the automotive arena. Petousis added that China has been a fearsome competitor to South Africa for many years in several key industries like steel, automotives, clothing and textiles, displacing local producers and putting jobs and domestic manufacturing under enormous pressure.
Mhlanga said: “We are going to see a flood of imports because of these tensions as China redirects exports away from the US where they are now less competitive. While policymakers are considering how to diversify the economy, finalising new trade deals can take between three and five years. We are going to have job losses if we can’t diversify our export destinations quickly enough, bearing in mind that other countries are going to do the same.”
Petousis said that the US has been in an existential crisis for decades since the Cold War.
“The world has enjoyed an unprecedented period of relative peace and free trade, supported by the US underwriting global security and, in turn, underwriting the free passage of goods via shipping routes that they protect under NATO. As a result, they have allowed China to enter the free trade market despite it employing mercantile policies reliant on government intervention and subsidies.” She went on to explain that in many ways, China’s entrance into the World Trade Organisation in 2001 was the crowning moment of globalisation, but it also sowed the seeds of globalisation’s destruction.
“One allowed a player to enter the market who was relying on large government subsidies and ultra-low worker wages – a model that most competing export nations cannot implement because it is a violation of the free market,” she noted. “As a result, the US has been left with ‘twin deficits’: a fiscal deficit driven in part by high military spending in order to protect the world beyond its borders, and a current account deficit due to reliance on cheap imports and the loss of domestic manufacturing capabilities.
“China, as the world’s manufacturing hub, has built up an enormous skill base during this period, while that of the US workforce has shifted from manufacturing into financial and technical roles. The US, for example, has completely lost its ability to build ships. The revised policies we are seeing out of the US are an attempt to address these imbalances.”
With China responsible for 30% of the world’s manufacturing output versus the US at 15%, power balances have certainly shifted.
Mhlanga added that the rise and fall of superpowers is cyclical, pointing to Japan, the UK and Spain as past examples, adding that the US may now be entering its own period of decline. “US productivity per worker has been falling, while China’s is rising, driven by investment in technology and artificial intelligence.”
South Africa’s balancing act
Petousis said that it is important to recognise that these shifts can play out over decades. As such, South Africa cannot afford to alienate itself from the West.
“We likely need a balanced foreign policy stance, engaging with both the BRICS nations and the West. The US remains the world’s largest consumer market, accounting for roughly 30% of global consumption – a position that cannot simply be replaced by China, which has been unable to grow domestic consumption – in part because real domestic wages have been suppressed in order to offer cheap goods into the market,” she noted.
Mhlanga said there are challenges in the short term for South Africa to grapple with, including navigating policy uncertainty after 2024’s global year of elections. However, the medium-term outlook appears promising, with growth forecast to rise for South Africa as a result of structural reform initiatives. “That would be a gamechanger for employment.”
Mhlanga also said he is encouraged by the collaboration between government and business: “The level of confidence in policy implementation depends on the convergence between political willingness and business support.”
According to Petousis, there are green shoots appearing in logistics and energy; however, reforms may take years to get off the ground and translate into economic gains. Many of the Transnet rail slots awarded to the private sector will require new locomotives to be ordered, for which the lead time is three to five years. The terms of business for these slots must also still be fleshed out before the private sector would likely feel comfortable to begin ordering locomotives and wagons.
Making long-term investment decisions
Speaking more broadly, Mhlanga added that investors need to have exposure to developed, or advanced markets, as well as emerging markets.
“As a long-term investor, ask, where is my future growth and return going to come from? The structure of global growth is shifting, which in turn will change the sources of investment returns. Diversification remains key, not replacing advanced markets, but recognising that emerging markets are likely to take a bigger share of the pie in the future.”
He said that growth rates in the US, UK, Japan, and Germany are relatively low, around 1–2%, whereas emerging markets average about 4%. Ten of the 20 fastest-growing economies are on the African continent.
Petousis added that Allan Gray and its offshore partner, Orbis, recognise some of these dynamics, and as such, have been underweight the US-dollar relative to its global index weight for some time, and instead have been finding good value in European and select ex-US currencies.
“The winners of the past will not necessarily be the winners of the future, so diversification is very important,” she said. “I would also not advocate for always buying the dip in a global market rout. If you had bought the US dollar after its ‘Liberation Day’ sell-off, you would have been out of pocket as it continued to decline. Instead, you need to think long term – about how the global landscape might look 10 to 15 years from now. That may require subtle but deliberate repositioning, especially if we are truly witnessing the rise and fall of nations – which is yet to be confirmed.
“There are a lot of moving parts – the possibility for an AI technological revolution can further shift the competitive advantage of various economies beyond what we’ve discussed,” concluded Petousis.