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Heading into 2025: Reflecting on 2024 and Embracing the Unknown

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CIARAN RYAN: Donald Trump is set to return to the White House in January next year for his second term as US president. Will he immediately set to work on his pledge to revive job growth in the US? What implications will this have for South Africa, especially with increasing tariffs from key trading partners? There are numerous uncertainties looming over the economic landscape as we transition into the new year.

We are now joined by Adriaan Pask, chief investment officer at PSG Wealth, to explore what lies ahead as we wrap up 2024 and step into the unpredictable year of 2025.

Hi Adriaan, thanks for being here again. Share your insights on the US economy and the critical outlook for 2025.

ADRIAAN PASK: Hi Ciaran, and greetings to all the listeners. This topic is fascinating, as there’s a stark contrast between the prevailing optimism and some of the data we’re currently analyzing.

Despite a largely positive outlook fuelled by economic growth, manageable inflation, and stable unemployment rates, many find it challenging to pinpoint reasons for pessimism.

This seems to be the general consensus among global investors. While various emerging and developed markets are encountering difficulties, the US appears to be leading the pack.

However, if we examine additional data and break down the statistics, there are concerning indicators that could start to affect investor sentiments in the upcoming year.

For instance, consumer debt levels are on the rise, alongside the costs associated with that debt. Mortgage rate changes in the real economy have been sluggish, largely because mortgages reset only when a property is sold and a new mortgage is applied for. Thus, interim interest rate hikes don’t have an immediate effect since individuals are stuck with their original rate.

Eventually, as people move to new properties, they will face higher mortgage rates, but this process is gradual since moving isn’t a frequent occurrence. Nonetheless, other forms of debt are climbing at a faster pace. In fact, non-mortgage consumer debt is on track to surpass the interest costs associated with mortgages, which are currently around $600 billion for both.

This trend is primarily fueled by rising credit card debts, which have surged to approximately $1.5 trillion in the US—a staggering 50% increase since 2021.

These credit card rates are linked to the Federal Reserve’s rates, and as they’ve escalated, so have consumers’ interest payments, which are now at levels we haven’t seen in decades. This mounting debt is becoming burdensome.

Simultaneously, the consumer savings rate has dropped significantly, halving from its historical average of about 8% to roughly 4% currently. This indicates that consumers are under strain and increasingly reliant on credit cards.

It’s also worth noting that these mortgage rates will inevitably come into play as well.

One key question arises: why have interest rates had such a delayed effect on the US economy?

Rates began rising in late 2021, with significant hikes in 2022, yet economic activity has persisted, which contradicts traditional economic expectations.

This delay, in my view, is largely attributed to the over $2 trillion of excess savings accrued during the pandemic, which helped offset the economic impacts of rising rates. However, that savings cushion is being depleted, and consumers are beginning to feel the strain.

Lastly, wage growth is now lagging behind the unemployment rate for the first time since COVID, which adds another layer to the narrative.

These consumer figures are critical, as they account for roughly 70% of US GDP. If the consumer is under pressure or if any cracks appear, it’s an essential factor that cannot be overlooked.

Simultaneously, corporate trends reveal similar concerns. Corporate bankruptcies have escalated since 2022, with quarterly filings doubling from about 12,000 to approximately 24,000. Moreover, around 50% of corporate debt is maturing within the next three years, necessitating refinancing at rates 2.5% to 3.5% higher than just two years ago, which will impact profit margins similarly to how rising funding costs are affecting consumers.

On the governmental side, it’s well-documented that we’re encountering twin deficits: a debt-to-GDP ratio surpassing 100%, and net interest expenses exceeding $1 trillion. This is starting to compromise government finances and its capacity to invest significantly.

In South Africa, we often face criticism regarding government expenditures on employees and associated financing costs, which consume most of our revenues, leaving little for investment.

However, the US situation isn’t dissimilar. Social security and Medicare expenditures account for nearly 50% of total revenues, while defense consumes another 14%. It’s critical to recognize that the majority of tax income is derived from consumers rather than corporations, making for a healthier picture in some respects, yet corporate tax contributions remain just 8% of overall revenue.

Hence, if we probe into these metrics more closely, it becomes evident that the situation may diverge from the current prevailing mindset. Awareness of these factors will be crucial as we head into the new year, and we might find ourselves facing interesting challenges.

CIARAN RYAN: Fascinating. How about the US political landscape and its wider implications on the world with Trump’s return to the White House? He has taken a very assertive posture regarding foreign policy and trade. What practical measures do you foresee upon his re-entry into office?

ADRIAAN PASK: I believe the previous term from 2016 provides valuable insights. I don’t think he’s changed much.

We can likely anticipate considerable turbulence and many direct, sometimes controversial comments, which will create turbulence.

It’s also evident that there’s awareness concerning the pressures on the US fiscal situation; efforts are likely to focus on easing consumer woes and addressing the state of US finances.

China has notably encroached upon US interests from various angles. Thus, I expect increased pressure on China, which could become quite tense, potentially leading to unexpected developments in our analyses.

While it’s arguable that increased pressure on China will have adverse effects, it may also force China into stimulating its economy, a choice they may no longer control, which could be beneficial for emerging markets—a somewhat unconventional view, yet one that we consider in our planning.

Nevertheless, aggressive trade negotiations aimed at strengthening the US position should be expected.

The new president is a negotiator who will likely utilize his leverage to achieve goals aligned with our expectations.

Regarding tariffs, the impact on inflation is significant. While inflation seems to be stabilizing, these dynamic economic factors can quickly turn surprises around.

Some of these policies could be inflationary, as pushing for onshoring to decrease reliance on others means focusing inward rather than seeking the most affordable products. This shift inevitably contributes to inflation from current pricing levels.

Taxation policies have also been extensively discussed. It appears that Trump has aspirations around this area that were left unmet during his first term, and although he may lack substantial flexibility in income reductions due to US fiscal challenges, I suspect he might forge ahead nonetheless, which could yield painful long-term consequences if it doesn’t stimulate growth.

Deregulation’s another factor to consider. Generally, I view it as positive for business fluidity and growth, albeit entailing risks. While some regulations may hinder industries that are over-regulated, others are crucial for maintaining market participant behavior.

Striking the right balance between beneficial and detrimental regulations will be key, and it remains to be seen how the new administration will interpret this.

Lastly, on immigration, voter expectations will be at the forefront, and numerous promises have been made. I’m concerned, however, that Trump’s last presidency faced disruptions that culminated in events on Capitol Hill that surprised many global investors, highlighting the potential for unrest in a country once regarded as the epitome of civility among developed nations. The current political landscape seems ill-prepared for such incidents.

We should closely monitor social tensions, as they could exacerbate existing issues.

CIARAN RYAN: Lastly, Adriaan, how will this all affect the markets? We’ve already seen some anticipatory movements, with markets responding positively to Trump’s impending return as a sign of profitability. Will this trend persist?

ADRIAAN PASK: We have observed intriguing trends; for instance, Bitcoin has performed remarkably well. Companies associated with Trump, such as his media firm and Tesla, have also enjoyed positive movements. However, the rapidity of these shifts raises questions about their justification given the limited evidence supporting such changes.

Such market behavior likely reflects broader speculation prevalent within the US markets.

The best reference point might still be 2016, a year marked by extreme volatility fueled by provocative comments across the political spectrum—prompting substantial fluctuations. It was indeed a challenging period for analysts attempting to interpret Trump’s often counterproductive assertions.

With respect to China, as I mentioned earlier, there could be a paradoxically positive turn, despite the tensions.

The pivotal consideration now is that nearly nine years later, valuations have significantly escalated since 2016. When valuations stretch too thin, they become sensitive to any potential challenges.

Therefore, I anticipate higher volatility. Should negative news emerge regarding the economy, the markets might react sharply.

Our advice is that now is an excellent time to explore investments beyond US borders. There are outstanding global companies presenting valuable opportunities, and diversifying away from the US could be prudent. Although it may require time, the fundamentals and data favor our perspective.

CIARAN RYAN: Let’s wrap it up there. Thank you, Adriaan Pask, chief investment officer at PSG Wealth, for joining us.

ADRIAAN PASK: Thank you, Ciaran. I appreciate it.

Brought to you by PSG Wealth.

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