South African businesses face ‘Mission Impossible’ 

South African businesses face a Mission Impossible task to make investment decisions in the current environment, which is characterised by elevated global and local uncertainty. 

Businesses have had to deal with various tariff announcements and delays on both South Africa and its major trading partners, significantly impacting the country’s forecasted economic growth. 

They have also had to contend with sustained tension between political parties within the Government of National Unity (GNU), limiting their ability to bet on the future. 

As a result, many have kept their cash on the sidelines, waiting for greater certainty before deploying capital in long-term investments. 

This is feedback from Old Mutual Investment Group (OMIG) portfolio manager Jason Swartz, who outlined the immensely difficult environment in which businesses are operating in at the firm’s latest quarterly update. 

Swartz said that financial markets have appeared to laugh off a lot of the concerns surrounding global growth, the United States’ financial situation, and the potential impact of tariffs. 

The market appears to view the tariffs as a negotiating tool rather than a permanent fixture of US trade policy or a revenue-generating mechanism. 

“I think the market is very ready, I think more ready than they should be, to move on from tariffs. This is despite the lack of clarity around where tariffs will settle and how long they will be implemented for,” Swartz said. 

“The market is focusing more on the tariffs being used as a negotiating tool as opposed to the actual impact of tariffs moving from 3% last year to potentially 15%, 20% in future.” 

Swartz explained that the reason for this may be that investors are simply fatigued by the various tariff announcements, which are only followed by delays and pauses. 

“There has been a lot of flip-flopping and walking back. This has very much diluted the impact, with a singular shock being avoided.” 

Another major factor is that the impact of tariffs has not translated into hard economic data, with US inflation yet to pick up and global growth appearing far more resilient. 

There has been a lot of stuff happening in the background, but the actual hard data has not come through yet, which is why the market may not be as concerned as expected. 

This does, however, make it extremely difficult for businesses to make investment decisions, as there is very little certainty about tariffs and their impact. 

Swartz said businesses would even prefer it if tariffs were elevated, but they were certain at which level they would land. This would enable them to adapt and make decisions accordingly. 

“But because of all the toing and growing, it has caused a lot of uncertainty and pushed consumer and business confidence downwards,” Swartz said. 

“It has almost made it Mission Impossible to make business decisions in this environment.”

Mission Impossible, cracks beginning to show

Companies have managed to deal with this ‘Mission Impossible’ so far, but it will not last forever, Swartz warned. The impact will come, with it being a matter of when and how severe. 

Some countries have seen their exports plummet as targeted sanctions on specific products begin to impact producers, with Brazil and Korea in particular seeing their exports plunge. 

Countries like Taiwan, which produce critical technology components that the United States needs, have seen their exports surge. 

Fortunately for South Africa, most of its exports to the United States are classified as critical minerals, making them immune to the worst effects of tariffs. 

However, the second-round effects are likely to be much more severe, with rising US inflation likely to push global inflation higher. 

Swartz explained that this impact has been masked by companies taking proactive measures to mitigate against the worst effects of tariffs and potentially make it through until they come down. 

“What has happened is that a lot of corporates have started to front-load activity and supplies, creating the perception of resilience in the market, which we think si going to start failing,” Swartz said. 

“Front-loading will unwind at some point, and the effect of tariffs will filter through into economic data and consumer behaviour.” 

Companies will be in an extremely difficult position when the front-loading unwinds, with many likely to experience intense margin pressure. 

Swartz said companies can try to protect their margins by passing costs on to consumers and potentially losing market share. Very few companies have the pricing power to pass these costs on. 

Companies can absorb the impact of tariffs to protect their market share and possibly gain sales, but take a hit on their margins. As with passing costs on, very few companies can stomach this for long.