The trade war: what it means for emerging markets

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With the focus on Britain’s exit from the European Union, China’s trade war with the emerging market is going unnoticed

With Brexit negotiations in the UK stalling, many in the UK are becoming frustrated and believe the government should just “get on with it” and reach an agreement. This is partly so they know what to expect and to provide some sort of groundwork for future trade negotiations with other countries.

Simmering trade war between the US and China

Lurking in Brexit’s shadows has been the emerging trade war between the US and China. This started in March 2018 when Trump imposed tariffs of $60bn on imports. China responded accordingly with tariffs on US imports; the constant retaliation between the two countries has damaged China’s economy. The economic damage is not only confined to the US and China though, emerging markets rely heavily on investment from both countries for growth and may find it lacking as the two countries scrabble for available funds.

China looking inward and increasing trade with south east Asia

China is South Africa’s biggest trading partner, and bilateral trade grew by 11.7% to $39.17bn in 2017. China also heavily invests in South Africa, with foreign direct investment reaching $15.2bn in 2017, accounting for 19% of all investment in South Africa.

Even though China’s Xi committed to $35m of investment in July 2018 investment like this cannot be guaranteed for the future, with tariffs imposed by the US affecting the economic environment in China. It also has a ripple effect on other economies, which may mean they too would find it difficult to trade and invest in South Africa.

It has recently come to light that Chinese conglomerate HNA Group has put its $18bn real estate assets in Sydney, New York and Hong Kong up for sale according to Reuters. Rumours are that China has ordered international companies to repatriate foreign reserves in order to bolster the RMB for further trade wars.

In future, China may choose to concentrate trade in south-east Asia, which has already increased in the past decade, especially in places such as Cambodia and Vietnam. If China is diverting its attention to its own economic state and trading with countries that are geographically closer, what will the impact be on South Africa?

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Confidence in SA economy waning

Confidence is also slowing in South Africa and demand for bonds has already dropped 67% from the previous sale, and to its lowest since March.

S&P Global Ratings have also kept their credit rating for South Africa below investment grade on Friday 23rd November. Poor economic growth and liabilities continue to lay heavily on South Africa’s prospects, and this can deter foreign investment. South Africa was once the preferred country in Africa to receive foreign investment, however according to Ernst & Young, its position has been challenged and it now shares that top spot with Morocco, indicating that attention is turning elsewhere in Africa.

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Policies such as land expropriation without compensation has already done much to disincentivise investors. South Africa has done little to thwart their concerns by withdrawing from treaties which were created to give foreign investors some protection. These include bilateral investment treaties with European Union members Germany and Spain, with plans to cancel further treaties in the future, or to be accurate – with the whole EU trade bloc. These actions will make South Africa a less attractive country to invest in and could explain why countries such as Morocco are becoming preferable to investors.

Alleged corruption in Zambia

It is not just South Africa’s turbulent political environment that has deterred investors.

In Zambia, mining accounts for 12% of the country’s GDP and 70% of total export value. This sector is the country’s main source of income and employment, and it is heavily reliant on investment to ensure the country’s growth and prosperity. Zambia was viewed as an attractive place to invest due to its long history of mining, political stability and good economic climate. Sentiment seems to have changed lately due to accusations of corruption in the government.

Corruption has affected the level of investment in Zambia, with Ireland, Finland, Sweden and now the UK stopping funding as it had emerged that £3.3m intended for poor families had gone missing. This money was vital to the prosperity of the country and failure to get rid of corruption will only reduce foreign investment further.

Brexit effect on the UK economy and why now may be a good time to invest

Since April 2018 the pound sterling has been in free fall and was officially marked as one of the most unstable and unpredictable instruments on the forex market. It looks like unless Theresa May can put together a deal that appeases the majority, the pound will continue to perform badly and align itself with some of the weaker and more volatile currencies. Unfortunately, due to the polarised opinions in her Cabinet, parliament itself and more widely the British public, it does not seem as though an agreeable deal will be reached.

GBP to USD exchange rate 2018 fallen from 1.42 to 1.28. Compliments of

Amongst this uncertainty, it could be a good time for investors to consider the UK property market. No solid negotiation looks to be made as Theresa May’s deal does not seem to appeal to most MPs in any party, due to the way in which the Irish border issue will be tackled and remaining part of the customs union and the continued role of the European Court of Justice – many aspects of the EU brexiteers wanted to leave behind. It looks increasingly likely that the UK will crash out of the EU with no deal. This means that there would be no transition period and the UK would revert to World Trade Organisation rules on trade which could see higher tariffs slapped on exports. The status of UK citizens in EU countries would be uncertain, as would the status of EU citizens in the UK. New trade deals would have to be brokered, but it is worth noting that these could take years – not days or months. The UK’s ties with the EU would be severed immediately and diplomatic relations will be severely bruised.

UK property sectors set to withstand Brexit uncertainty

The UK is home to many prestigious universities, with 18 featuring in the top 100 of 2018’s QS World University Rankings and the University of Oxford and the University of Cambridge occupying the first and second spot on the table. It of is no surprise why studying in the UK is so appealing and why so many international students decide to apply. In fact, according to UCAS in 2018 there was a 2% rise in applications from students in the EU, and a 6% rise in applications from students outside of the EU. The dip in the number of national students applying to university was due to the lower number of 18-year-olds in the UK, not a depleted interest in further study. These students require accommodation, and as such it is in high demand which has caused a 2.9% headline rental growth in 2017. The appeal of UK universities and the rise in the number of international students makes for an ideal environment for a successful student property investment.

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Other sectors that are isolated from the effects of Brexit include the retirement home investment sector, as the success of these investments is underpinned by Britain’s demographic changes rather than political. These homes are marketed towards the over 60s who wish to downsize to release equity or want the companionship, and therefore they generally do not have any underlying health issues. This means that the shortage in nursing staff that Brexit could cause will not have a profound effect on the sector.

With all this uncertainty ongoing, the pound is weak against other currencies which makes investing in the UK and its property market more accessible. Speak to UK property experts to find out more about these investment sectors that will remain buoyant despite Brexit. The looming threat that Britain will exit the EU without a deal is concerning to the mainstream housing market, but there are still ways to make money from property investment, and whilst the pound is weak now is the best time to act.

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