Investment Perspectives

Highlights from the quarter

US trade tariffs dominated headlines this quarter, following Donald Trump’s “Liberation Day” tariff announcement on April 2nd. Equities, both locally and abroad, sold off sharply in response, on fears of a significant slowdown in economic growth.

Within days the S&P 500 fell almost 20%, before Trump announced a temporary suspension of tariffs, sparking a swift recovery in equities back to new all-time highs by quarter end.

Central banks, including the SARB, cut interest rates this quarter, while the US Fed stayed on hold. Fixed income markets shifted focus from easing to debt sustainability, as the US readied Trump’s landmark bill involving around cutting taxes and healthcare spending and increasing borrowing.

Towards quarter-end, Israel attacked Iran and convinced the US to join the war. Initial fears of a major escalation of conflict in the region quickly died down following a ceasefire agreement.

During the quarter Cyril Ramaphosa met with Donald Trump at the White House, in an unsuccessful attempt to strengthen their relationship. The quarter ended with the DA backtracking on fresh threats to exit the GNU.

Markets

South African equities fell sharply as Trump’s tariff announcement shocked markets, igniting fears of an economic slowdown. The correction was short-lived however, with the 90-day reprieve announcement sparking a strong recovery in global equity markets over the remainder of the quarter.

The FTSE/JSE Capped SWIX ended Q2 sharply higher (+9.7%), with the resources, financials and industrials indices all posting strong gains. Resources were driven by gold and platinum stocks, which benefitted from higher precious metal prices. Financials were boosted by the banks, insurance and listed property shares, while industrials were lifted by large cap rand hedge stocks.

US Technology stocks were a key driver of global equity returns this quarter, after being the main drag in Q1. This pauses the growing narrative that US equity leadership may be under threat, prompting investors to seek other geographies. The dollars’ further decline this quarter is evidence of the potential shift in investor preference.

Global bonds delivered a muted return in rands this quarter (+1.0%), as developed market bond yield curves steepened. Longer dated yields drifted higher and some central banks like the ECB and BOE eased policy. The bond outlook remains clouded by the threat of higher prices due to the tariffs, the US Fed’s higher-for-longer posture, and worries about US fiscal policy and debt sustainability.

Unlike developed market bonds, SA nominal government bonds performed well (+5.9%), particularly longer dated maturities. Continued strong performance after last year’s rally is a function of a narrowing SA risk premium, persistently low inflation and continued SARB easing. The rand tracked bond yields lower, strengthening around 2% against major DM currencies this quarter.

Economy

The stock market’s performance this year is at odds with the outlook for global economic growth. According to multiple international organisations growth is expected to slow significantly this year. The main cause is the ongoing trade war between the United States and its major trading partners, creating a climate of uncertainty, and dampening investment and consumer confidence.

In April the IMF lowered its global growth forecast by 0.5% to 2.8% for 2025, in large part due to the halving of its previous forecast of US growth to 1.8% for the year. The downward revision reflects concern about the negative shock of rising trade barriers and their impact on economic activity worldwide.

For now, the US economy appears to be holding up better than expected, and prominent institutions have been lowering their odds of a recession. Data is however mixed, while the true impact of the tariffs is difficult to untangle, given the “front-running” of tariffs that has taken place.

During the quarter National Treasury and the SARB trimmed their 2025 growth forecasts for SA, to 1.4% and 1.2% respectively, though both remain more optimistic that the IMF’s 1.0% prediction.

Coming into the year there were hopes that political stability, accelerated reform and increased privatisation, improved energy supply, higher confidence, and lower interest rates might kickstart a meaningful turnaround. Unfortunately, this has thus far remained elusive and arguably less probable near term given the emergence of global risks.

The global inflation outlook is as murky as the economic growth outlook, but for now the inflation trend remains largely down (outside of a few exceptions). The US Fed is concerned that the tariffs will lead to higher prices near term, hence their reluctance to ease policy too quickly, however, some argue that any tariff shock should prove transitory.

In SA, inflation has been well-contained, printing below 3% for 5 of the last 8 months. The runway was therefore clear for the MPC to cut rates again in May, which was its fourth cut this cycle. The SARB has arguably been slow to cut, but they have been mindful of external risks. This quarter we saw an example of one such risk, in the form of Israel’s attack on Iran, which briefly threatened to send oil prices significantly higher.

Portfolio Positioning

Portfolios are currently overweight SA equity and have been since the national election in 2024. This was helpful during the quarter and year-to-date, with SA equity having dominated the other major asset classes.

The local market remains attractively priced, and analysts still expect solid earnings growth this year, supporting the outlook. We are however mindful that the global economic backdrop is currently challenged, and for this reason our overweight remains modest for now.

Portfolios are neutral on global equities, which are less attractively priced than local, skewed by the US, which re-rated higher over the second quarter. There is speculation that the events of this year have provided a catalyst for a shift in leadership away from the US and a sustained period of US underperformance relative to the rest of the world. This remains an open question, but the dollar’s decline could be an early indication of this. If true, this would be positive for non-US global equity exposure, including emerging markets like SA.

SA nominal bonds surprised positively this year, but we have maintained our slight underweight since late last year, following the impressive post-election rally. With bond yields having now come down significantly, our view is enhanced cash offers a more compelling option for now.

Despite the setback earlier this year, the National Budget was eventually tabled, and encouragingly the GNU has held. We have yet to see a credible path to improving the debt trajectory however, so our sense is the fiscal health outlook remains unchanged for now. Regardless, should investor appetite towards emerging markets strengthen, then SA bonds should be a beneficiary.

The outlook for global bonds, which we have been overweight, has become less compelling of late, as recession odds have fallen and as the market has become overly optimistic regarding the likely extent of Fed easing. Though US treasury yields are high in the context of the past 20 years, we expect them to be rangebound over the medium term as the tug of war between growth and inflation carries on.

Outlook

Looking ahead, the combination of mixed macroeconomic data, erratic US policy and an increasingly polarised world gives rise to a wide range of potential outcomes going forward. And the fact that markets have learned to take Trump’s threats with a pinch of salt has added a further layer of complexity.

For now, we are open to both optimistic and pessimistic states of the world and are consciously refraining from overreacting to the barrage of daily news flow. Overall, we remain constructive, but cautiously positioned, with a flexible mindset and ample room to dial risk up or down should it be called for.