Tariffs and transition: Geopolitical uncertainty and financial markets

When we talk about geopolitics, we often default to the geopolitics of war and physical conflict. However, geopolitics centres on foreign relations and economic security, from which war ensues. The most significant impact on the global economy and financial markets in 2025, so far, has been Trump’s trade tariffs and the fears of a full-blown trade war.

The escalation in trade tariffs by the US culminated in the Liberation-Day tariff announcement on 2 April, where even the penguins of Heard Island had to prognosticate on the implications of a 10% reciprocal tariff. Since then, we have had an environment of TOTO – tariffs on, tariffs off – with various pauses and extensions. These are meant to come to an end on 1 August 2025, yet we still cannot be certain.

The White House has sent off a raft of letters over the past week, informing countries of the new pending reciprocal tariff, as well as a willingness to negotiation. So even if the tariffs are implemented on 1 August, they may yet change. Comprehensive trade deals have been sparse, as these usually take years to negotiate. Trump’s coercion tactics have had success with some countries, like the UK, Vietnam and Colombia, who buckled quickly, while others like Canada and China have been holding out for a better deal or retaliating outright. South Africa received its letter confirming the reciprocal tariff at 30%, but it is plausible that the bulk of our mineral exports to the US will remain exempt.

Trump’s trade tariffs pursue multiple aims: increasing fiscal revenue, narrowing the trade deficit, securing digital sovereignty, and gaining an edge in AI. The result is not only the realignment of global supply chains, but also mounting economic and financial fragmentation. Eastern nations, especially after Russia’s reserves were expropriated in 2022, are diversifying away from the US dollar, favouring gold and digital currencies. The BRICS+ bloc is developing an alternative payment system, further accelerating this shift in global capital flows and prompting a reaction from the US administration.

Amid the TOTO environment, financial markets have become increasingly desensitised to tariff headlines based on the declining reaction to the news flow. The escalation of the Iran-Israel tension had a short-lived impact on oil prices and financial markets, further evidence of geopolitical fatigue setting in. This complacency introduces downside risk to asset prices, should the macro environment deteriorate more rapidly without a stimulative policy response.

From a cyclical perspective, frontloaded trade activity ahead of the Liberation-Day tariffs should give way to lower imports and inventory depletion. While the extent of the tariff passthrough remains unclear, consumer price inflation is set to reaccelerate in the US, which will dampen real income growth. The US economy should lose momentum during 2H25. While there will be negative spillovers to the rest of the world, the weaker US dollar serves as a positive offset by easing global financial conditions. The disinflationary impact of moderating growth and stronger exchange rates will give central banks room to ease, even more so if the Fed restarts its cutting cycle.

From a structural perspective, weak confidence could limit much-needed private-sector fixed investment, resulting in lower productivity growth. If the gap is filled by government capex, then markets will have to contend with larger budget deficits. Higher borrowing costs and less efficient supply chains will put downward pressure on corporate margins. Where the strong rebound in equity markets may reflect the pending cyclical policy support from central banks, they do not reflect the longer-term pressure on margins, particularly in the US.

While the real world is set to diversify its China exposure, the financial world is set to diversify its US dollar exposure. This brings into question the long-term status of the US dollar as the reserve currency and US Treasuries as the safe-haven asset. With this comes shifting correlations amid rising macro and market volatility. This requires an investment approach that prioritises resilience and diversification.

Within the PPS Defensive Fund, we balance growth assets — poised to benefit from mild inflation and policy easing — with the defensive qualities of income-generating holdings. To account for complacency, we have hedged a portion of our equity exposure where we are overweight versus our strategic allocation. Our stance favours domestic cash, particularly yield-enhancing floating-rate notes, while remaining underweight offshore cash given our view of a stable to stronger rand. We remain neutral on offshore equity and fixed income, but are steadily diversifying the portfolio to reduce — though not eliminate — US exposure. We believe a balanced approach will serve investors well during this transition period, while limiting the whipsaw impact of market reactions to tariff headlines.

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