Geopolitical turmoil, surging commodity prices, and local fiscal restraint

NAVIGATING INVESTOR STRATEGIES

The conflict's deep-rooted geopolitical implications affects lives, global politics, and economics. Historical, territorial, andreligious complexities hinder its resolution - shaping the investment landscape. This analysis provides guidance for investors inthis intricate geopolitical environment. Regulatory changes, government interventions, and public opinion shifts prompt adaptability to minimize risks and optimize returns.

OIL AND GOLD PRICE REACTIONS TO CONFLICT IN THE MIDDLE EAST

During the Middle East violence, oil prices surged by 3.5%, halting a previous decline and potentially leading to a lasting oilprice increase. The ongoing conflict could potentially lead to a lasting rise in oil prices, contributing to higher inflation. Conflict in the Middle East tends to be inflationary due to the region's significant role in oil production, accounting for nearly a third of the global oil output. A war in the region could escalate the risk of a major oil supply disruption, further impacting prices. Continued rise in oil prices may manifest in consumer inflation expectations in the West, subsequently affecting interest rate expectations and investor sentiment. Gold, a safe-haven asset, saw a 3% value rise due to lower bond yields.

IMPACT ON FINANCIAL MARKETS

Geopolitical events briefly impact financial markets. US shares rallied after the attacks, but uncertainties in global shares persist amidst geopolitical concerns and monetary policy. Conflict results in market volatility, especially affecting countries directly involved like Israel, Palestine, Turkey, Qatar, UAE, and Saudi Arabia.

Heightened uncertainty triggers stock price fluctuations, which impacts currencies, bonds, and financial instruments. Safe-haven assets experience an influx of funds during crises.

ASSESSING THE RELIABILITY OF SAFE-HAVEN ASSETS

Safe-haven assets generally boast higher liquidity, making them more accessible for purchase and sale. However, there are indications that traditional safe-haven assets, like US government debt and the US dollar, may be losing their efficacy during crises. Empirical research conducted by the US's National Bureau of Economic Research demonstrated that although the US dollar appreciated during the peak of the pandemic in March 2020, the degree of its appreciation in comparison to other currencies was less than observed during the 2008 financial crisis.

Likewise, while treasury bonds typically exhibit an upswing in times of turmoil, recent crises have witnessed a deviation from this pattern. March 2020 did not witness the expected influx of safe-haven funds into long-term treasuries. Instead, treasury yields spiked which resulted in price declines, including a rise in the yield of five-year treasury notes.

Some argue that the substantial and growing US deficit has diminished the status of the US dollar and treasuries as dependable safe-haven assets. This is due to the potential threat they pose to the US's centrality in the global financial system.

In the context of the ongoing conflict in the Middle East, if the US becomes more intricately involved, it could further challenge the assertion that US assets are safe havens. Geopolitical events of this nature often prompt a revaluation of traditional safe-haven assets, potentially urging investors to diversify their portfolios beyond the conventional choices to effectively manage risk. Safe-haven asset reliability is shifting. Traditional safe-havens like US debt and the US dollar might be losing their effectiveness during crises.

INVESTMENT RISK AND CHALLENGES

Political instability disrupts businesses and trade, affecting companies in the conflict region. Diversification across assets, sectors, and regions helps mitigate risks - off setting losses in one area with gains in another.

DIVERSIFICATION AS A RISK MANAGEMENT STRATEGY

Diversifying one's investment portfolio is a fundamental risk management strategy, especially in volatile geopolitical environments like the Middle East. By spreading investments across various assets, sectors, and geographic regions, investors can mitigate the impact of a conflict-induced downturn in a specific sector or region. A careful analysis of portfolios and strategic asset reallocation can aid in achieving a balanced and diversified portfolio.

2023 MID-TERM BUDGET

The latest Mid-Term Budget Policy Statement (MTBPS), delivered by Finance Minister Enoch Godongwana, illustrates that the government is facing significant fiscal challenges. Including a budget shortfall hitting almost R57 billion. The Minister emphasized the need for fiscal restraint and budget cuts due to lower-than-expected revenues. Godongwana highlighted that the country's public finances have considerably weakened, with the main budget deficit soaring by R54.7 billion compared to initial estimates, creating a substantial mid-term budget shortfall of R56.8 billion.

One significant announcement in the MTBPS was the extension of the Social Relief of Distress (SRD) grant for another year, imposing an additional cost of R34 billion on the government. The Finance Minister also disclosed a cumulative reduction indepartmental budgets totalling approximately R154 billion over the three-year medium-term expenditure framework.

Although this reduction may seem relatively small considering South Africa's annual budget of more than R2 trillion, it will result in reduced allocations for certain departments and underperforming municipalities. It’s noteworthy that South Africa's borrowings continue to surge, with interest or finance costs currently consuming around a fifth of the government's finances. The country anticipates borrowing an average of R553 billion per year over the medium term.

Thus, the MTBPS reveals the struggle to balance fiscal constraints and essential expenditures as the country manages aprecarious financial landscape.