Navigating the 2025 Investment Landscape: Strategies for South African Bonds, Commodities, and Cash Investments

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JEREMY MAGGS: The global economy might have stumbled into 2025, grappling with renewed trade conflicts, ongoing inflation, and South Africa’s lackluster growth rate of merely 0.6%. Uncertainty appears to reign supreme. Moreover, the anticipated national budget has been postponed to May 21 amidst the fragile government of national unity [GNU]. Investors are left with numerous questions and minimal clarity.

Let’s delve into these challenges. I’m joined by Mark Phillips, head of portfolio management and analytics at PPS Investments. Mark, in light of last year’s 0.6% growth rate, do you still view South Africa as a viable long-term investment opportunity, or are the foundational issues too critical?

MARK PHILLIPS: Thanks, Jeremy. Although South Africa isn’t experiencing a booming phase, it is managing to stay steady. The Reserve Bank is currently taking a cautious approach, with the OECD upgrading South Africa’s 2025 growth forecast to 1.6%, a notable improvement given last year’s performance.

This can largely be attributed to strong commodity export outcomes and a relatively stable inflation environment. The SARB has opted for a pause in March after acting in January, showing sensible caution.

As you’ve pointed out, there is significant political noise regarding the budget, VAT [value-added tax], the need for structural reforms, and the uncertain synergy within the GNU.

JEREMY MAGGS: You’re not alone in highlighting that trade fragmentation and tariffs present serious global risks. For investors in South Africa, do you think they are underappreciating the potential consequences of a Trump 2.0 scenario on a market like ours?

MARK PHILLIPS: The tariff shock in April may turn out to be one of the most significant events we’ve seen in a generation. The current 90-day pause might only provide temporary relief. Some might draw parallels to the implications seen in the 1930s, potentially reshaping global trade dynamics and investor confidence.

South Africa remains a relatively liquid emerging market [EM]. Thus, any negative sentiment towards EMs can resonate here. However, opportunities may arise; if there is a pivot away from the U.S. dollar and a chase for yield, we could find ourselves well-positioned. Nonetheless, substantial political and structural reforms are crucial, and whether we engage actively in those remains to be seen.

JEREMY MAGGS: Where do you see opportunities, Mark?

MARK PHILLIPS: Given our current bond yields, which are quite appealing—inflation plus 5%—there’s a positive outlook. Both the SARB and the IMF have suggested broader disinflation, making higher real yields advantageous in a portfolio context.

That said, inherent risks remain. When assessing asset allocation or tactical strategies, we are underweight in certain asset classes due to existing fiscal uncertainties. However, a strong real yield can support a portfolio over time.

JEREMY MAGGS: Mark, let’s concentrate on the individual investor. Based on what you’ve described, how should they manage risk and adjust their mindset?

MARK PHILLIPS: Ultimately, reflecting on 2024 can provide some perspective, even though history may not repeat itself precisely. As we entered this year, the overarching sentiment was recovery. For 2025, it’s vital to strike a balance: will the U.S. and China choose to de-escalate? If not, that would be concerning. Conversely, if Trump reduces taxes, we could witness a favorable surprise.

During turbulent times, the urge may be to act. Nevertheless, we stress the importance of remaining disciplined and cautious, ensuring ample exposure to nimble managers adept at navigating forthcoming challenges.

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The market currently anticipates a technical recession—nothing further. The prevailing opinion is that Trump may have paused, but he could redirect course, resulting in a difficult environment where pricing in risk becomes challenging following a tariff announcement.

JEREMY MAGGS: That truly is the challenge, isn’t it? The unpredictability associated with Donald Trump complicates risk assessment immensely.

MARK PHILLIPS: Exactly. One must exercise caution. Our strategy has revolved around resilience while retaining flexibility of thought. We have adopted a moderate risk-on stance regarding South African equities and extended duration in global bonds to adjust to the current flight to safety.

The first quarter has indicated that markets are increasingly swayed by narratives. Recent announcements have placed us on a trajectory of significant uncertainty that we need to adapt to.

As we near July 4, the temporary relief from the 90-day pause might not endure. It’s essential to confront the new reality of geopolitical fragmentation and the unpredictable policy outcomes on fiscal settings and trade.

JEREMY MAGGS: What risks does PPS currently perceive for portfolio erosion? Is it within equities, as you’ve noted, or perhaps in bonds or even cash?

MARK PHILLIPS: When economic conditions tighten during a crisis, safe havens can shrink. However, our positioning is shaped by various considerations, including valuation and ongoing momentum shifts.

We continue to favor South African equity owing to solid valuation fundamentals. As demonstrated in Q1, there is safety in real assets, and our commodity and gold producers have strengthened the equity market. Consequently, opportunities are present.

While we remain cautious regarding nominal bonds, the outlook for real yields is encouraging. Cash remains critical, both locally and offshore, due to uncertainty and as a buffer against possible market pullbacks.

Global equity appears richly valued, and we are adopting a neutral stance, as sometimes missing out on a bull market can impede long-term portfolio performance. We’re aiming to maintain this balance, ensuring we comprehend when to diversify from the U.S. towards the euro or other emerging market currencies.

JEREMY MAGGS: Thank you very much, Mark Phillips, for that insightful summary. You are the head of portfolio management and analytics at PPS Investments.

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