Asset managers will keep a close eye on four major themes when deploying capital in 2025: Trump, tariffs, interest rates and rising debt.
The Trump administration’s tariff-fuelled trade war will likely stoke inflation, which would shake up the stock market.
However, US President Donald Trump’s first term was generally positive for risk assets, particularly US equities, which complicates an already tricky outlook.
“The danger for investors is that they continue to favour investment strategies that have worked in the past, even as markets undergo deep-seated changes,” says John Gilchrist, chief investment officer at PSG Asset Management.
Gilchrist says markets are in the midst of a major recalibration, and that the winners of the future will look substantially different to those of the past.
“While we expected that a rotation would occur at some point due to the imbalances accumulated in the global economy over the past 15 years, Trump’s actions have accelerated this process.”
Gilchrist says the results so far have been a weakening dollar and the rotation of capital away from the US into areas that were deprived due to the dominance of the US exceptionalism narrative.
“Given that these recalibrations seldom transpire smoothly, we will likely continue to see bouts of uncertainty and elevated levels of volatility in global markets.”
In an effort to deliver market-beating returns and hedge portfolio risk, asset managers are investing in countries where rates are lower, with strong GDP and earnings growth potential.
“Most local asset and fund managers are underweight the US and see better opportunities in Europe and various emerging markets, including South Africa,” says Rushil Jaga, executive head of asset management at PPS Investments.
“On a relative basis, South Africa has performed better than many offshore markets, with the local equity market up 10% year to date, while the S&P 500 is down 3%-4% and the broader global market is flat.”
Jaga says broad exposure to the resources sector has buoyed the local market, benefiting from strong precious metals prices, particularly gold.
We will likely continue to see bouts of uncertainty and elevated levels of volatility in global markets
— John Gilchrist
However, the fragility of the GNU holds risks for the local market, cautions Gilchrist.
“In our view, select assets trading at depressed valuations provide an acceptable margin of safety. More broadly, we believe price-sensitive, bottom-up active managers will have a unique advantage in positioning their portfolios in this environment.”
From a global perspective, Richard Carlyle, equity investment director at PPS Global Equity Fund investment manager Capital Group, says the fund held a long-standing underweight position in US equities and is overweight Europe relative to its benchmark.
“Even before Trump became president, we decided to reduce our exposure to the expensive US market, applying a bottom-up stock-picking approach for select US equities, with a rotation into more affordable stocks in Europe and Asia, which is a strategy that has served us well.”
Carlyle says the fund has a preference for companies that will benefit from changing global patterns, such as the shift from high-street shopping to e-commerce, the rise of AI-led digital disruption, health-care companies with leading research & development programmes and anti-obesity drugs, and manufacturers that are embracing industry 4.0 technologies.
From an asset allocation perspective, Gilchrist says asset managers should have sufficient exposure to growth assets as inflation looks set to remain higher for longer.
PSG Asset Management is positioned in sectors and industries characterised by supply constraints or long lead times to bring production online, where firms are likely to have pricing power.
“Given low valuations locally, we continue to see scope for selected South African stocks and bonds. Given that many assets are priced for worst-case scenarios, even marginally better outcomes could lead to better than expected performance from select local assets,” says Gilchrist.
“We also think that local investors can benefit from good real returns from local fixed income markets, but they must be prepared for occasional bouts of volatility and ensure yields compensate for the risks.”
Gilchrist believes that unconventional portfolio hedges such as gold and energy stocks will continue to play an important role in tempering volatility, especially as conventional portfolio hedges such as US bonds could prove less reliable as diversifiers in the future.
Jaga adds that asset managers looking to diversify portfolios are increasingly including alternative assets. “The demand for hedge funds has picked up in the past three years, with private equity and private debt becoming more popular.”
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