Investment Perspectives – Equity markets in Q2 2025

Growth Stock market performance this year has been at odds with the outlook for global economic growth.

Equities, both locally and abroad, sold off sharply in response to Donald Trump’s “Liberation Day” trade tariff announcement on April 2, 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. 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.

Markets

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.

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. Regardless, should investor appetite towards emerging markets strengthen, then SA bonds should be a beneficiary.

Outlook

The outlook for global bonds, which we have been overweight on, 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. 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.