In our last Market Outlook, we mentioned that the year would be a roller-coaster ride led by Trump, and it certainly has been. We believe that this volatile ride will continue. The S&P 500 reached an all-time high in February, dropped 19% over the next two months, and then recovered to reach a new all-time high.
S&P 500 Index
This volatility extended to the JSE, which fell by 10% in April but then rebounded sharply to reach a record high, largely due to a soaring gold price as Trump’s antics drove central banks to buy more “safe-haven” gold.
JSE All Share Index (Rands and US Dollars)
The JSE is up 16% year-to-date, largely driven by the gold sector, which is up 80%, and Naspers, which has risen 32%. However, the SA Inc. sector remains flat, reflecting stagnant South African economic growth and a lack of interest from foreign investors.
Extreme uncertainty is fuelling volatility
The market volatility is primarily driven by uncertainty, a factor that has persisted since COVID, but has been exacerbated by the Trump presidency.
Frequency of the word “uncertainty” used in economic reports
These uncertainties primarily stem from Trump’s changing US policies, including new tariff levels, shifting implementation dates, crucial geopolitical interventions, and now his attempt to pass a new bill that will further increase debt, which is already at record highs. All these factors can have significant global economic consequences, keeping the market uncertain and, therefore, volatile.
Adding to this is the rapid spread of news via social media, which influences “Soft Data”. This comprises various human sentiment surveys, which are used as leading indicators for “Hard Data”, such as GDP and inflation numbers. Currently, there is a large gap between soft and hard data, with soft data turning increasingly negative. While this is understandable given the current uncertainties, it raises a cautionary note, as markets don’t seem to be fully accounting for potential headwinds.
Hard and Soft Data Indexes
Tariffs, Tariffs, no Tariffs
A lot of people had never heard of tariffs before Trump, but now it’s one of the biggest talking points in investment markets.
There was the initial “Liberation Day” tariff shock in April, which caused markets to plunge over 10%. Then, some tariffs were stopped, others were slashed, some were increased, and then paused again. Currently, the new tariffs have been paused until 9 July, and China’s until mid-August.
For businesses, these proposed tariffs have been very disruptive. Companies have had to revise their plans, as supply chain costs and product pricing may increase. Adding to the challenge is the ongoing uncertainty around tariff changes, which has escalated volatility and led to a slump in business confidence. This has slowed overall economic activity, as evidenced by the recent decline in global container shipping volumes.
The potential implementation of new, higher tariffs will likely have a negative effect on the global economy. (Please refer to our last note – Tariffs and the Trump playbook). On 9 July, Trump is expected to announce the new deals that have been concluded and confirm which tariffs will be implemented. It is understood that Chinese tariffs may be eased further due to the U.S. securing rare earth supply agreements.
As noted in our previous communication on tariffs, our view has consistently been that Trump is using tariffs as a bargaining tool, and that their overall economic impact will likely be negligible. Currently, the investment market is pricing in zero negative impact from tariffs, supported by expectations of a potential further pause.
Will Tariffs lead to a US recession?
The graph below shows a survey of U.S. investment fund managers and their forecasts for the U.S. economy; whether it will slow down gradually (a “soft landing,” with no recession) or experience a “hard landing” (a recession). These forecasts have shifted significantly over the past four months.
Global geopolitical risks remain high
The conflicts in the Middle East and Ukraine remain heightened as East and West continue to compete for dominance. Unfortunately, Trump has not only failed to halt the war in Ukraine but, in our opinion, has escalated tensions in the Middle East.
For investment markets, the primary concerns stemming from global political tensions centre on the potential impact on oil shortages and the disruption of shipping routes.
When in doubt, stay invested for the long-term
History shows that, on average, markets recover fairly quickly after a sharp decline. The graph below illustrates the average investment returns following 29 previous S&P 500 declines. 83% of these declines have been followed by a positive year, with an average twelve-month recovery of 12.3%.
Ballooning US Debt
The U.S.’s massive $35 trillion debt, which stands at 120% of GDP, is currently in the spotlight, especially as Trump’s new “Beautiful Bill” is projected to add an additional $3 trillion. While this level of debt is already exceptionally high, the greater concern is that $9 trillion of this debt needs to be refinanced in the second half of the year and will likely be refinanced at much higher interest rates compared to when it was first issued during COVID at near-zero rates.
The rationale behind the high debt level is that it is necessary to finance growth, which is expected to ultimately generate revenue to repay the debt. However, in a higher interest rate environment, debt repayments become increasingly burdensome.
SA remains strangled by bad politics
The GNU remains fragile, as the ANC struggles to accept its loss of control in Parliament. The budget dispute, including the reversal of the VAT increase, was a significant blow to the ANC. Hopefully, this will make them realise the necessity of collaborating with other parties in the GNU. The polling graph below illustrates the sharp decline in ANC support in April, following the Budget/VAT debacle.
Party polling since the Election
The formation of the GNU is a positive development, and some encouraging economic progress is taking place. However, the pace of change is still being stifled by an inept ANC.
We are confident that the GNU will remain in place until the next municipal election at the end of 2026, despite the ongoing disputes. We are hopeful that the planned infrastructure improvements will materialise, helping to kick-start critical economic growth.
SA is desperate for growth
Consensus GDP forecasts for 2025 have been revised down to 1% from 1.4%, as consumer demand remains weak and global growth projections have also been downgraded to around 2.5% from 3%.
The reality is that South Africa needs to grow its GDP by 4% to reduce unemployment meaningfully.
The positives are as follows:
- Low inflation, currently at 2.8%, with interest rates expected to decline by a further 0.5% this year.
- Strict monetary policy: Although the Reserve Bank has been criticised for being too conservative (a stance we share), this approach is viewed positively by foreign investors as a sign of good governance.
- A positive primary surplus: A consecutive surplus was posted in 1Q25. This occurs when government revenue exceeds non-interest expenditure. While this is not material in the fight to reduce our debt, it does signal better management of government finances.
- A positive trade surplus, boosted by low oil prices and higher precious metal prices, which is supporting a firmer Rand.
- The new Rail Bill, which will boost private sector participation, supported by a $1.5bn loan from the World Bank.
- Removal from the Grey List – expected by year-end.
- Rating agency support: Recent reviews by both Moody’s and S&P remain supportive, despite the ongoing GNU disputes and disappointing growth.
SA equities are cheap
Despite the recent rally on the JSE, largely driven by gold shares, South African equity valuations remain attractive. The forward P/E ratio of the All Share Index stands at 9.7x, well below the historical average of 12.2x. This is despite the shift towards a lower interest rate environment, which is positive for both economic growth and equity performance.
JSE All Share forward P/E multiple
Foreign investors are still selling
There has been some foreign buying of South African bonds over the last 12 months, as the government debt outlook appears more favorable. However, foreigners continue to sell South African equities, as economic growth remains disappointing.
Foreign bond and equity net flows
The Rand returns to normal, with a stable outlook
The Rand spiked to 19.7 against the US Dollar in April when Trump rattled markets with his high tariff announcement. The spike was in line with other Emerging Market currencies. Subsequently, the Rand improved and, year-to-date, has strengthened against the US Dollar, largely due to a weaker Dollar.
The Dollar Index has weakened by 10% this year, effectively since Trump took office. This follows a high base, after 10 years of significant Dollar strength, with a 20% increase. The outlook for the Dollar remains negative as tariffs take effect, US debt continues to balloon, and Trump pressures the Fed to lower interest rates.
US Dollar Index
Fundamentally, we value the Rand at 17.5 to the US Dollar. This is determined by purchasing power parity (PPP), which reflects what R1 can buy compared to 1 US Dollar. Our model currently estimates PPP to be around 14.8.
However, due to economic risks such as high debt, low growth, and a fragile political environment, a risk premium is added to the PPP valuation, ranging from 20% to 30% as these risks fluctuate.
With the formation of the GNU, there is a sense of political confidence and optimism surrounding South Africa’s economic growth prospects, which is crucial to addressing our high level of debt. This reduces the risk of a debt spiral crisis and should help restore some stability to the Rand’s value.
As these risks are mitigated—particularly the removal of the debt trap with improved growth prospects—the risk premium should decrease, supporting a more stable currency.
The Prosperity Fund continues to produce superb returns
After a superb 2024, with a return of 19%, the Fund, managed by director Nick Brummer, has remained reasonably stable in very volatile markets, delivering an annualised 10% year-to-date. This performance matches its average compound returns of 10% per annum over the last 10 years.
Prosperity fund performance since inception (19 Sep 2014)
The fund prioritises capital preservation through conservative management. It is designed for investors seeking a balanced portfolio with both local and international exposure, offering consistent investment returns. The fund reflects Investonline’s in-house market views, which we aim to replicate across different investment risk strategies for our clients.
Its unique investment management style primarily involves taking short-term tactical positions in asset classes that are irrationally priced, based on a combination of top-down and bottom-up fundamental research. To a lesser extent, longer-term strategic positions are incorporated when major market opportunities are identified.
Market outlook
We believe global markets will remain volatile in 2025 as Trump’s rhetoric persists and continues to be difficult to predict.
Global equity markets are up 15% over the past year, pushing the MSCI World Index forward P/E ratio to 18.5x, above its 30-year historical average of 15x. Despite this, a positive case can still be made for certain regions and sectors within the current declining interest rate environment. Regionally, we find Europe and Emerging Market (EM) valuations attractive and prefer more value-oriented sectors outside of the overvalued technology space. This is evidenced by continued investment flows out of U.S. equities and into Europe and EM markets.
The US market has reached an all-time high, despite facing serious headwinds, such as a 40% chance of a recession, the negative effects of tariffs, and the significant bond refinancing required in the second half of the year.
We remain positive on South African equities, as their valuations are attractive and there are several positive factors that could drive economic growth through 2026. This should lead to much-needed foreign investment inflows, particularly in SA Inc. sectors.
Review your Investment Strategy
With global investment valuations widening, it’s essential to ensure that your investment portfolio is properly balanced and aligned with your personal risk profile to achieve your financial goals. Regularly review your financial plan to ensure it remains up to date. It is crucial that the risk you take in your investment portfolio aligns with your financial plan, particularly as you approach or enter retirement.
