It’s a small world, after all: The global economy and your investments

The name Klemens von Metternich is one you’re likely not familiar with, but chances are very high that you’ve heard – at least once before – the quote “When America sneezes, the world catches a cold”. Metternich, an Austrian statesman of the 19th century, is believed to be the man behind the phrase that inspired it. His original was along the lines of “when France sneezes, the rest of Europe catches a cold”, but both versions describe with precision how the condition of one country can impact the wellbeing of others. In the case of America, that would be most others, including us down here at the bottom of Africa, almost 15 000 km away!

Understanding the global economy

The US, China, Japan, Germany, and India are currently the five leading economies of the world, according to the World Economic Forum, and together, they account for half of the world’s gross domestic product (GDP), “a reference point for the health of national and global economies”, explains the International Monetary Fund (IMF). The rest of the top 10 is made up of the UK, France, Canada, Russia and Italy.?

Outside of the top 25 economies, “167 nations account for just 16% of global GDP” – a perplexing dynamic, to say the least. If your nation is one of those 167, you are particularly susceptible to developments of the global economy, which is defined as “interconnected worldwide economic activities that take place between multiple countries… [that can] have either a positive or negative impact on the countries involved”.?

To help you make more sense of this, consider that, according to the IMF, “a third of the world is forecast to enter recession in 2023, as the US, China, and the EU all experience a slowdown. Even if nations don’t go into recession, it could ‘feel like’ they do because of slowdowns elsewhere”. Emphasis on elsewhere.

What in the world is going on

Post-pandemic, things were coming along relatively better – then came along one Thursday, the 24th of February 2022, when Russia invaded Ukraine, and things took a wrong turn. Apart from the human factor and the physical, mental and emotional devastation that comes with war, the one-year old conflict has very dire economic impacts, too. Consider that Russia is the world's second largest producer of crude oil and take into account that Ukraine and Russia account for roughly 30% of the world's wheat exports and 20% of maize exports (South Africa imports roughly a third of its wheat from the two countries) and it then makes sense why bread prices increased by about 20% and fuel hit record levels last year.?

The Organization for Economic Co-operation and Development (OECD) is of the view that the ongoing war is “hindering global growth and aggravating inflationary pressures, creating a new negative supply shock for the world economy, just when some of the [Covid-19] supply-chain challenges appeared to be fading”.?

Additionally, the OECD estimates that global growth will slow in 2023, to 2.2% (or 2.9% if you ask the IMF) in the face of high energy prices, weak household income growth, declining confidence and – very importantly – tighter monetary policy and higher interest rates. The US has been particularly aggressive in raising its interest rate in an effort to cool soaring inflation in the country.

Locally, you will recall that in late January, the South African Reserve Bank’s Monetary Policy Committee raised interest rates by 25 basis points, marking the eighth consecutive hike in the current cycle. It’s a complex issue to unpack here, but to protect the value of the rand, our central bank must keep pace with its international counterparts, particularly the US, which is why you’re paying more on your mortgage and any other debt you may have.

Strong dollar, weak rand

The US dollar is the most widely traded currency in the world. According to the 2019 Triennial Survey of turnover in OTC FX markets, the USD was on one side of 88% of all trades in April 2018. The New York Times reported in July 2022 that the currency was the strongest it had been in a generation, while this year it hit a six-week high in mid-February. There is also the matter of the country’s strong labour market, as a healthy US labour market is, in very simple terms, good for the dollar but not for our rand.?

It doesn’t help that said rand has had a rough start to the year. We are only three months in, and already it has lost over 8.5% value relative to the US’ greenback. It’s also currently among the worst-performing emerging market currencies. While much of this has to do with our very blue Eskom blues and the devastating impact on economic activity, among other important factors, the US dollars’ ongoing rally doesn’t help.

It’s tempting to dismiss what happens with the dollar under the guise of it not being our currency. The reality, however, is that we very much do rely on the dollar, and when the rand is weak, we pay more for this safe-haven currency. Think, also, of buying oil: South Africa buys oil in dollars, therefore a weak rand means we pay more for oil. The impact of this is felt by ordinary South Africans as the increased costs trickle down to the consumer, affecting your ability to get on with day-to-day life as the costs of living, fuel, food and others skyrocket. It’s all connected.

What this means for you

Apart from paying more to live and possibly having less to invest, developments in the global economy affect your investments in a variety of ways. For example, when foreign investors hold a negative view about a currency, they are less likely to invest in it and would rather put their money into safe-haven options, such as the USD. We thus see the rand depreciating.?

A depreciating rand makes it more expensive for you to invest abroad, which can hamper your ability to diversify globally and take advantage of international opportunities. Poor diversification can put your portfolio at risk as you are, generally, more susceptible to market shocks and downturns, which can be prompted by any number of factors, including the ones discussed above. (The most significant events to affect the US stock market in recent times include the dot.com crash in 2000, the subprime mortgage crisis that started in 2007, and the Covid-19 crash in 2020).?

So whether your home is in Atteridgeville or Blouberg, Colenso or Dainfern, Emalahleni or Fort Beaufort, or even Zeerust for that matter, what happens around the world should be of significance to you – not least because it impacts your money matters – lest you be left battling a niggly financial fever.

*Does not constitute financial advice. Shyft operates under the license of The Standard Bank of South Africa Limited, an authorised Financial Services Provider (FSP number 11287).