Warning for South Africans invested in the Magnificent 7

United States President Donald Trump’s focus on reducing his country’s unsustainable fiscal deficit through aggressive tariffs is rattling the US stock market.

This presents a significant risk for South African investors who are heavily exposed to US companies like the Magnificent 7, which includes Google-owner Alphabet, Amazon, Apple, Facebook-owner Meta, Microsoft, NVIDIA, and Tesla. 

Old Mutual Investment Group chief investment officer Siboniso Nxumalo recently explained that Trump’s second term as president of the United States differs significantly from his first.

“The US, in particular, faces structural shifts, with the business cycle maturing. This is introducing some interesting risks,” Nxumalo said. 

“This time, we have ‘Trump the Strategist’, as he walks a tightrope between populism and pragmatism.” 

Nxumalo’s comments come after Trump’s so-called “Liberation Day” on 2 April, when he announced severe tariffs on the world economy, including South Africa.

Trump’s tariffs were more wide-ranging than initially expected and more severe in specific cases, with South Africa being hit with 30% tariffs on local goods exported to the US. 

Late on Wednesday, 2 April 2025, Trump announced a global 10% tariff on all imports and higher rates for the ‘worst offenders’, including South Africa.

Nxumalo explained that, under Trump’s current administration, global markets face more headwinds than tailwinds due to widespread geopolitical uncertainty, persistent inflation, and fiscal fragility.

“Ultimately, he is using an ancient playbook not seen in more than 100 years when it comes to sourcing revenue,” he said.

“Global investment challenges such as trade tariffs, global debt, de-globalisation and sticky inflation levels are all problems that the world hasn’t collectively faced since the 1940s, and which create an environment that investors are struggling to understand.”

He explained that Trump’s trade tariff policy is about more than just protectionism – the US President is using tariffs as a key revenue tool.

The United States needs this revenue to address its significant fiscal deficit. However, Nxumalo said the implications for US and global economic growth are alarming.

“But if you set aside all the noise around the disbanding of USaid and US defence support for Europe, ultimately he has no choice given the size of the fiscal deficit,” he said.

“The US’s burgeoning debt deficit is coupled with higher interest rates, which makes further borrowing a huge challenge.”

A change in priorities

Old Mutual’s head of equities research, Meryl Pick, explained that the Trump administration is effectively implementing a revenue reorientation, where it receives revenue from trade tariffs rather than introducing new sources of revenue. 

“History has shown us that tariffs have a negative impact on global growth,” she said. 

“Unfortunately, Trump doesn’t seem to care about their growth implications. He is focused on fixing the US fiscus regardless of the negative consequences over the short- to medium-term.”

In addition, unlike his first term as President, Trump appears unconcerned with the impact of his policies on the US stock market.

Rather, Nxumalo said Trump is more preoccupied with US 10-year government bonds. 

“The reason behind this lies in the $9.2 trillion of US debt that will either mature or need to be refinanced in 2025,” he explained. 

“Given higher interest rates, the US government does not want to refinance their debt with long-term paper.” 

“This makes the stock market a low priority at this point, considering that lowering the yield on 10-year bonds is a far more urgent incentive.” 

This presents an interesting turning point for the United States. 

“If we look at US presidents throughout history, when a president starts off at these stock market levels, the prospective returns are not generally promising; this worries us,” he warned. 

“Compounding this concern is that US equities are currently priced for perfection, with multiples stretched, and the Magnificent 7 tech giants are no longer surpassing expectations.” 

“These great expectations are setting markets up for further disappointment.”

While US stocks may disappoint investors in the next few years, pick said it is important to distinguish the South African economy from the local stock market. 

“Although we are an emerging market, we have access to a wide range of global high-quality businesses that trade on the JSE, with 60% of JSE companies’ revenue actually earned offshore,” she said. 

“Over the past 20 years, domestic stocks have actually done very little, with global stocks such as Naspers, Richmond, Bidcorp etc, driving JSE performance.” 

“This is where we’re continuing to look for opportunities in our market.”