Helping clients navigate tariffs and politics in 2025
The South African stock market has powered into 2025 with its own version of the United States’ Magnificent Seven, but instead of being pushed ahead by technology stocks, local investors are benefitting from a resurgence in the precious metals sector. The buy-and-hold passive investing crowd have seen their faith in the JSE All Share Index rewarded, more than doubling their capital over the five years since the pandemic lows in early 2020.
Positioning portfolios for sustainable growth
FAnews attended a recent Discovery Invest adviser session that unpacked a range of macroeconomic indicators before offering asset allocation views for balanced and fixed income funds. Kenny Rabson, CEO of Discovery Invest, interrogated Hannes van den Berg and Malcolm Charles, portfolio managers at Ninety One, on prospects for the coming year. Key issues included the impact of evolving US trade policy, South Africa’s outlook amid rising political uncertainty and positioning portfolios for sustainable growth.
Hannes van den Berg, the first of the portfolio managers to take to the podium, opened with reflections on financial market volatility before setting out to answer whether local investors should be getting jittery about prospective equity returns given the 20%-plus year-to-date surge in the JSE. He also commented on the rand’s resurgence: the local currency has strengthened from 19.50 per US dollar around Liberation Day, in April this year, to 17.50 per dollar by mid-August.
“Globally, we have been talking about the Magnificent Seven driving indexes; in South Africa, the JSE is being driven higher by precious metals, the gold and platinum companies,” Van den Berg said. He mentioned individual stocks like Gold Fields (+120% year-to-date), Sibanye Gold (+160%), and Northam and Impala Platinum, each more than two times their market capitalisations over the period. On the flipside, consumer and financial stocks were lagging, with Foschini, Mr Price, Nedbank and Truworths deep in negative return territory.
US indices strong, but lagging
The balanced fund portfolio manager observed that everything outside the US had outperformed the US of late. The main reason for this was that investors were concerned over consumer-based firms’ pricing power in light of President Donald Trump’s ongoing trade tariff wars. Share prices are under pressure as the markets weigh up whether these businesses will be able to absorb the tariffs, reroute their supply chains or end up simply passing increases on to consumers.
Rabson asked Van den Berg whether global index performances hinted at a shift from the US to Europe. “Two thirds of global markets are linked to the US, making it dangerous to bet against them,” Van den Berg responded, adding that the country was blessed with a consumer-led economy, quality businesses and the prospect of continued tech sector momentum on the back of investments into artificial intelligence (AI). He also reminded the audience that South Africa made up just 0.7% of the MSCI All Country World Index (ACWI).
Malcolm Charles, who manages fixed income funds, stepped up to address wider concerns over a US slowdown or recession. He noted that Goldman Sachs and JP Morgan were factoring in a 60% chance of a recession in April 2025, dropping to 20% in August. “This does not mean that a US recession will not happen, but it does mean that the US Federal Reserve will be a bit more vigilant,” Charles said. He expects the Fed to be more growth than inflation focused going forward, adding that the US can look forward to an interest rate cut in September.
Allocating capital amidst uncertainty
Van den Berg steered the conversation towards allocating capital amidst uncertainty. He shared a slide showing the valuation and return on capital invested across various geographies. “US companies generate 19.4% return on invested capital, some of the highest in the world,” he said. “The return on equity may be high in emerging markets, but their cost of capital is high.” But the argument for continued US equity exposure dilutes down to the quality of its businesses.
“At 22 times price to earnings the US market is not the cheapest in the world, but you have to play that quality argument against it,” Van den Berg said. Turning to South Africa, he commented on the impressive consensus forecast of 20% or higher earnings growth for both 2025 and 2026.
Rabson cast his eye further into the future, asking why local earnings growth was forecast to slip to just 6.4% in 2027. Two constraints sprung to the fore. First, the country’s low economic growth was keeping foreign capital on the sidelines, and second, the precious metals price boom could have run its course.
Charles was called upon to share the local macroeconomic view. He said South Africa Inc was heavily invested in the success of the Government of National Unity (GNU) before comparing the arrangement to a dysfunctional, loveless marriage. “What has stood out for me is how the newer, younger ministers have grasped the nettle and actually done some pretty good things,” he said, singling out Leon Schreiber at Home Affairs and Barbara Creecy at the Department of Transport for special mention.
Tariffs may not be too detrimental
Both Charles and Van den Berg were optimistic throughout, arguing that the 30% tariff imposed on South African exports to the US would have less of an impact than originally feared. They said that precious metals, which make up the bulk of our exports to that market, are exempt, while the US accounts for less than 4% of our total agriculture exports. Auto manufacturers remain vulnerable, but have been exploring alternative markets.
South Africa’s terms of trade are solid thanks to the combined impact of higher precious metals prices (exports) and low oil prices (imports). “You have commodity prices going through the roof and oil prices coming down, making a perfect mix for South Africa,” Charles said. There were even whispers that National Treasury might see a revenue windfall in the coming years on the back of higher mining sector income tax and royalties.
Ninety One commended the South African Reserve Bank (SARB) governor and his team for their disciplined approach to implementing the country’s monetary policy. “Our view is that they are done [cutting interest rates] for this year for the simple reason that inflation is likely to tick up from now,” Charles said. He expects inflation to move up from 3% mid-August to 3.6% by the end of September, and nearer 4% by year end. If all goes to plan, consumers could benefit from another round of rate cuts in the second half of 2026.
Forecasting double-digit returns
The Discovery Diversified Income Fund is on track for another year of double-digit returns. The fund is overweight South African government bonds that are offering attractive yields of 9-10.5%; considering opportunities in the listed property space; has built up exposures to offshore credit; and has low exposure to foreign exchange.
Commenting on local equities, Van den Berg said many firms in the banking, consumer and insurance sectors were forecasting impressive double-digit earnings growth in the current period. “There is a valuation underpin for a lot of South African stocks, and we believe we are at a cyclical low from an earnings perspective,” he said, mentioning banks like Capitec and First Rand, and noting that life insurers such as Discovery and Sanlam were priced attractively, as was the short-term insurance counter, Santam.
The fund has 71.6% invested in equities alongside South African nominal bonds (17.8%) and smaller percentages in gold and offshore cash and zero offshore bonds. This fund is 37.8% globally invested, and has to maintain a sub-limit of 55% South African equity exposure.
Writer’s thoughts:
Financial advisers are being challenged to balance short-term risks from tariffs and politics with long-term growth opportunities. How are you positioning client portfolios to withstand uncertainty while still capturing upside in 2025? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
