Positioning portfolios for a fragile GNU and a new world order

In turbulent times, it’s easy to be swayed by news cycles and market swings. But emotional reactions and overconfidence can cloud sound judgment.

Shaun le Roux

It is crucial to stay focused on what truly matters for markets — filtering out noise and calmly assessing the real impact of developments. In politics especially, it’s not the headlines that count, it’s the policies.

Recent events, like the Government of National Unity (GNU)/National Budget standoff locally and new US tariffs, highlight the difference between policy and rhetoric. While both have moved markets in the short term, at PSG Asset Management we focus on what’s likely to matter over the long term, using an evidence-based and unemotional approach.

Notably, while South Africa’s policy direction has remained steady, the US is undergoing major policy shifts. Our local markets have largely priced in the significant political and country-specific risks, but US investors seem far more complacent about the challenges ahead.

Budget 2025: The first real test of a fragile coalition government

The recent GNU Budget standoff unsettled markets and raised doubts about the stability of the coalition in South Africa. Local assets lost some post-election gains, and the rand weakened as uncertainty grew.
South Africa urgently needs a solution to its fiscal challenges. Government debt must be brought under control, but there's no easy agreement on how to manage the tough trade-offs this requires. While GNU parties agree on the need for fiscal discipline, the real sticking point is how to share the pain.

Structural reforms remain essential to fixing South Africa’s fiscal challenges by growing the economy, but unless the major parties find common ground, questions around the GNU’s long-term viability are likely to persist.

The impact on SA assets

The budget impasse triggered a sharp sell-off in local assets, including the rand, but also created renewed value in South African assets. We increased our exposure to domestic equities, as valuations reflected a strong risk buffer. With local assets already pricing in worst-case scenarios, even modestly better outcomes can deliver strong returns, just as we saw in the post-election relief rally of 2024.

Looking ahead, we expect more of the same locally: weak governance and slow reform will likely continue to constrain growth. However, there are supportive factors on the horizon. The global backdrop may improve for commodity-exporting countries like South Africa, even though new trade tariffs could weigh on global growth and add near-term uncertainty. Locally, rate cuts could support consumer spending and investment.

Despite political noise, domestic policy remains largely unchanged, and with local assets trading at low prices and offering high yields, we believe they continue to offer compelling long-term value, especially given the risk premium compensates investors for largely visible and well-understood risks.

US trade policy: significant changes are afoot

In contrast, the Trump administration is driving major policy shifts that could significantly impact global markets. Its ‘America First’ stance marks a move toward nationalism, a retreat from globalisation, and a shift toward a more divided, multi-polar world, reshaping trade and international relations in the process.
President Trump’s policy direction has often lacked consistency, with conflicting objectives and implementation that appears reactive and unpredictable. Internationally, his policies have disrupted long-standing alliances and global trade dynamics. Tariffs, in particular, seem based on questionable assumptions and overlook the complexities of global supply chains. Recession risks in the US have risen, and if such an outcome materialises, it may be largely self-inflicted.

Uncertainty is a killer

The Trump presidency has added significant uncertainty to global politics and markets. Tariffs may eventually be adjusted, but the damage to global trade relationships is likely lasting, with a return to the old order seeming unlikely.

Following the 2 April ‘Liberation Day’ tariffs, the US dollar weakened meaningfully, a reflection of rising concern over US fiscal and trade policy. While equities priced in recession risk, bonds responded unusually, with yields rising despite a weaker outlook. This may signal that investors are reassessing US debt risks and starting to demand a premium on assets once seen as virtually risk-free.

The long-standing idea of US exceptionalism is fading. Structural headwinds like rising debt and limited policy flexibility may now work against the US, especially after years of heavy global exposure to US assets and outperformance driven by mega-cap tech stocks. As a result, capital is likely to shift toward other regions, especially emerging markets and parts of Europe and Asia that have room to stimulate their economies. The recent weakening of the US dollar reinforces this view: historically, a softer dollar has supported emerging markets and commodity prices, trends we expect to continue.

The genie is out of the bottle

Markets rely on trust and the Trump administration’s treatment of long-time allies, along with its readiness to impose penalties on friends and foes alike, is prompting countries to rethink their global ties. As a result, the once-unquestioned safe-haven status of US assets is now under scrutiny.

We expect global market shifts to unfold over several years. With less room for fiscal stimulus and rising concern over US debt levels, the US economy may lose momentum. Bond yields are likely to stay elevated, and investors could continue rotating out of crowded US positions. After years of dominance by growth stocks, value investing may finally return to favour.

Ultimately, we believe the market landscape ahead will look very different from the past and it will favour active managers with a track record of finding value in overlooked areas. With US exposure deeply embedded in global indices, investors will need to take a more deliberate, active approach to ensure their portfolios are properly positioned for what lies ahead.