HeatMap

The outlook for global markets in the first quarter of 2025 looks set to be primarily driven by the incoming US president as he gets his feet under the White House desk again. There will be a complex and evolving reaction to the potential impact of his administration’s increased protectionism, lower taxes, deregulation, and tighter immigration, and the effect that these will have on monetary policy and economic growth. Recession odds remain low but will depend on global trade stability and consumer confidence. The result could be a wait-and-see approach from markets for the conviction with which the Trump administration implements these policies.

Chair Powell has emphasised that policy will dynamically respond to any Trump-led fiscal boost. The Fed may slow down or even halt cuts if inflation surges.

Trump’s aggressive trade policies and potential tariff hikes could exacerbate China’s export challenges. Nevertheless, the PBOC’s accommodative stance and potential for further fiscal intervention serve as a buffer against trade risks. Chinese valuations remain compelling, especially if the PBOC maintains pro-growth policies.

South Africa’s assets look set to continue enjoying the benefits of increasing sentiment, falling rates, and benign inflation. However, accelerating progress on structural reforms will be required to ensure this is sustained.

‍

The breakout of long bond yields post the Fed cut in September 2024 suggests underlying concerns beyond inflation, with fiscal risks and supply-demand dynamics possibly exerting further pressure on long rates. 

The strong dollar continues to pose a risk to emerging markets, potentially impacting their growth and stability. Additionally, the strong market performance in a narrow segment raises the potential for increased volatility. 

The market seems to carry a cautious yet optimistic stance. The global economy is expected to continue its growth, led by the US, which is expected to have above-trend growth and to outperform other advanced economies. However, potential policy shifts, such as tariffs and slower immigration, could pose risks. Inflation is expected to gradually decrease, but policy uncertainty and geopolitical tensions are a concern. Investors should remain vigilant and adaptable, considering these dynamics and their implications for the market.

‍

2024 proved to be a solid year for most asset classes, and we are pleased with the decent returns our clients have experienced. It’s a positive outcome for the investment community as a whole.

Looking ahead to 2025, we remain optimistic. We continue to see potential upside in local asset classes. Equities still offer value, and while bond yields decreased in 2024, they remain attractive. Our portfolios remain predominantly tilted towards local investments.

Globally, we anticipate the US will maintain strong GDP growth, though we do have some concerns around valuations and the potential impact of Trump-era policies. We are prepared to navigate the volatility these factors could introduce. In Europe, while growth and political developments pose risks, equity valuations present interesting opportunities. We remain overweight in Japan, although we hold a more cautious view on the Chinese market.

‍

‍

Globally, while Trump’s anticipated pro-growth and pro-business policies will likely support US equities over the short term, we remain cognisant of stretched valuations, market concentration, and risks to the US economy. Confidence in US stock markets is at record highs, with optimistic earnings expectations, providing little room for disappointment. Many large tech companies are also highly vulnerable to proposed tariff increases. 

Elsewhere, less stretched valuations and pessimistic positioning provide attractive opportunities, but relatively lacklustre growth, political chaos, and potential trade wars suggest caution. China’s stimulus capacity and increased willingness for intervention could provide support, benefiting emerging markets, but whether these measures will be enough to offset the impact of harsh tariffs from the US remains to be seen.  

Local markets have seen an impressive recovery since the formation of the GNU, with improved sentiment and risk appetite combined with attractive valuations resulting in a significant re-rating of local assets. While the theme remains in place, effective policy execution and delivery on growth will be crucial to support earnings. Local bonds should continue to benefit from anticipated rate cuts, given the low inflationary environment, while still providing some yield buffer to external shocks. We are wary of local credit, with risk compensation (spreads) at historically low levels. 

We are taking a diversified approach to regional exposures, preferring active management at the sector and stock level. We are maintaining neutral equity weightings, while also maintaining a moderate level of SA bond duration across portfolios.

The end of 2024 brought about heightened levels of volatility across financial markets, largely caused by Trump’s win as well as the Federal Reserve’s hawkish tone at their December meeting. The former event caused a surge in prices and the latter caused a widespread ‘risk-off’ sentiment that saw much of the gains erased.

Our outlook for Q1 2025 is one of optimism for offshore equities, specifically for the US, given the robust US consumer that continues to spend undeterred by higher interest rates. Furthermore, given the Fed’s hawkish stance on account of inflationary fears linked to the election of Trump, we believe this will detract investment into emerging markets until a clear path of disinflation is accepted. 

Last year we saw the Reserve Bank mirror the Fed in terms of rate cuts, but given South Africa’s struggling economy and higher real rates, we believe it will begin cutting rates more aggressively than the Fed. Therefore, we believe local bonds will continue to be attractive.

‍

Though locally interest rates have been cut, they are still relatively high and giving investors the opportunity to attain decent return above inflation at a meaningful degree of certainty. These local fixed income assets are a cornerstone for our portfolios at present, when we apply an outcomes-based investment philosophy.

Within our portfolios, we are closer to our strategic allocations than last quarter as conviction over some active bets has been reduced. Our investment committee has increased offshore allocations from a large underweight to a slight underweight. The expectation that the Trump administration would be supportive of a stronger dollar from an economic policy standpoint will likely keep emerging market currencies under pressure. Similarly, while we believe local equity remains attractive, the change in valuation has allowed us to trim the asset class.

From a valuation perspective, US equities in particular are not attractive, and we remain invested in active managers and equity styles that give exposure more broadly than the large technology focus in the index. Emerging market exposure has been increased to slight overweight as we balance the attractive valuation against macroeconomic risks with the Middle East conflict and possible trade tariffs as examples.

‍

The investment outlook for 2025 reflects a complex mix of political, economic, and market dynamics. Trump’s return has shifted global expectations, with his pro-growth policies likely to boost US economic expansion but also heighten long-term inflation risks. Globally, opportunities vary across regions, shaped by diverging economic trends, monetary policies, earnings prospects, and valuations.

In South Africa, the outlook appears more optimistic. While SA fixed income was initially preferred, SA Inc. companies continue to offer compelling valuation opportunities despite inherent risks. This marks a more positive stance on local assets compared to previous quarters.

In this dynamic environment, asset allocation remains critical. US mega-cap stocks continue to inflate global valuations, while growth equities driven by the AI narrative remain expensive, increasing the appeal of value-focused equities. To navigate this evolving landscape effectively, investors should prioritise an active and adaptive approach.

The first quarter of 2025 brings a cautious tone as Donald Trump re-enters the presidency, introducing new geopolitical and economic uncertainties. His administration’s early policies and rhetoric are already influencing market sentiment, particularly regarding foreign relations and fiscal priorities.

The Federal Reserve has signalled a slower pace of rate cuts, citing persistent inflationary pressures and the need to assess the long-term economic effects of the Trump administration’s policies. This shift comes after a period of aggressive monetary easing, raising concerns about tightening financial conditions and their impact on growth.

Investor sensitivity to information remains elevated, as evidenced by recent market reactions. The abrupt selloff in response to perceived valuation risks suggests investors are cautious of current market prices and that new information will leave assets subjected to high volatility. Q1 2025 has the potential to set the scene for expectations of the year – the market has both the capacity to continue its momentum as well as slow down and wait for earnings to catch up to valuations.

For the start of the fourth quarter, Mentenova maintains a moderately overweight position in South African nominal bonds, driven by attractive valuations, the onset of the rate-cutting cycle, and a peaking U.S. dollar. South Africa's inflation softened to 4.4% in August, slightly widening the SA-US inflation differential, further supporting bond yields. Foreign investment in SA bonds continues to rise, with net inflows increasing to USD 1.1 billion for the quarter, as the market remains optimistic about a domestic economic recovery.

Additionally, SA bonds offer compelling value relative to other emerging markets due to easing inflation pressures and favorable currency-hedged yields.

We also maintain a moderately overweight position in SA equities, supported by improving political and macroeconomic conditions, attractive valuations, and emerging market strength amidst dollar weakness. Foreign investor interest in local equities is improving and anticipates further gains as the domestic economy stabilizes.

The outlook on the rand is cautiously neutral, with expectations of further strengthening against the USD. Meanwhile, Mentenova has shifted from a moderately underweight to a neutral position in offshore bonds due to attractive yields but uncertainty around the U.S. economic outlook following the Federal Reserve’s recent rate cut.

Most asset classes have produced very high returns in 2024, fueled by lower inflation prints and the subsequent interest rate cuts. Locally, the formation of the GNU provided a strong impetus to SA-sensitive assets. As we move deeper into 2025, we think a few things are likely to drive markets. Globally, the US president-elect takes office in January, and his policies, especially for emerging market countries like ours, are likely to cause some volatility. Expectations of further interest rate cuts in the US will also be a key driver of markets next year. In South Africa, the strength of the GNU will be put to the test as politicians navigate their way around policies like NHI and the BELA bill. Given all this uncertainty, we do not have large TAA positions in our funds. We are overweight local assets compared with global assets, driven by attractive valuations. Globally, we still prefer equities and bonds. We remain negative on SA and global cash as we think central banks will continue cutting interest rates in 2025, albeit at a slower pace.

The US has outperformed other global markets in recent years, driven largely by the Magnificent Seven technology stocks. We have held the view for the past year that continued outperformance of US equities would require a broadening of participation across the market. 

The presidency of Donald Trump may further support this broadening market in 2025. However, as was prevalent throughout Trump’s first term in office, elevated volatility is expected in his second term, and the economic impact of his policies is uncertain, with varying growth effects depending on their implementation. 

For emerging market equities, the negative potential growth impact of Trump’s proposed policies on some countries in the region should fundamentally curtail returns by the asset class unless proven unfounded and we currently favour developed market over emerging market equities.

Locally, several challenges that previously hindered the South African economy, such as high inflation, a weak currency and political uncertainty, are now turning into tailwinds. Attractive local equity and bond valuations that still incorporate excessive risk premia should also support returns from these SA asset classes. 

SA cash currently offers investors an attractive prospective real yield, particularly on a risk-adjusted basis. Among the local asset classes, it is only the listed property space where there are conflicting fundamental and valuation signals that make us circumspect about the risk-reward available in this sector.

After a decent period of returns through overweight allocations in SA property, SA equity and developed market equities, we started reducing risk assets in December. Although we are still positive on risk assets, we feel interest rate cuts are not going to be as significant as the market might be anticipating, dampening our risk appetite heading into the first quarter of 2025. Together with the unknown implications of a Trump-led presidency (with some Musk influence) and unpredictable Chinese policies, we feel that volatility is going to be the theme of the quarter. Fortunately, a diversified strategy can gain from attractive real yields in cash, bonds and property. Our underlying managers remain confident that there are enough specific stock selection opportunities in global and local markets to provide investors with double-digit returns this year. Our portfolios are therefore designed to be flexible in navigating the difficult macroeconomic environment through process-driven tactical asset allocation shifts.

Q1 2025 market outlook: Cautiously optimistic

‍As we enter 2025, we reflect on the challenges of 2024 – a year marked by significant geopolitical events and surprising election outcomes. Despite the uncertainty, most markets delivered positive results, providing investors with some relief.

Looking ahead, the return of Donald Trump as US president and ongoing geopolitical tensions will likely dominate headlines, creating both volatility and opportunities. Key policy developments will be watched closely: proposed tax cuts and deregulation could support global equities while pressuring bonds, whereas tariffs and stricter immigration policies may weigh on both asset classes.

Our primary areas of focus for 2025 remain inflation, interest rates and market valuations.

Inflation and interest rates

We expect inflation in developed markets to remain above the 2% targets, prompting central banks to maintain steady interest rates in 2025. The South African Reserve Bank may lower rates further, but a decision to hold rates steady is possible.

Valuations

While US equity valuations are elevated, opportunities lie in international markets, particularly outside the US. We are monitoring earnings closely for any signs of weakness, which could prompt a more cautious approach. In South Africa, selective opportunities exist within equities and bonds.  

Disciplined asset allocation and active portfolio management will be essential in navigating what promises to be another interesting year.

‍

Multi-Asset Team Q1 2025 outlook

Market sentiment swung to both sides of the pendulum during the course of 2024, shifting from early optimism to mid-year caution, and finally stabilising towards a more balanced outlook. Geopolitical tensions and global macroeconomic challenges drove volatility, but pockets of renewed optimism emerged as risk-on assets gained traction.

Monetary policy remained a key theme, with major central banks balancing inflation control and economic growth. China’s stimulus measures highlighted its economic fragility, while South Africa’s political reforms and interest rate cuts bolstered market confidence.

Following the SA elections, foreign interest in under-owned South African assets was revived. Interest was further driven by attractive valuations, high yields, and improved political stability compared with some emerging market peers.

Our current positioning remains closely aligned with our strategic asset allocation benchmarks, maintaining a slight defensive tilt. Fixed income is favoured over equities on a risk-reward basis, and SA assets are preferred over offshore assets.

‍

Inflation is proving to be more sticky than central banks would like in a number of developed markets. In addition, the recent rally in the oil price and the prospect of widespread increases in tariffs raises the chances of inflation remaining at uncomfortable levels for the foreseeable future. As a result, central banks are likely to be slow to cut rates even as nascent signs of a global slowdown become evident. While the outlook for the year ahead is cloudy, the US market offers little to no margin of safety in our view. In contrast, we see value in SA risk assets with several tailwinds: inflation expectations no longer being an obstacle to cutting rates, consumer incomes having been boosted by tapping two-pot savings and our expectation that the budget in February will beat rating agency expectations.