2024 can be marked as a year of geopolitical turmoil. From Donald Trump’s re-election as president, the UK’s choice of the Labour party, the ousting of France and Germany’s leaders, a GNU formed in South Africa, to the terrible wars in the Middle East and Ukraine. Yet, investment markets continue to hit record highs globally and locally. So, are these political changes positive for investors or are other significant factors driving market attractiveness?
Global investment markets start 2025 at an all-time high, and with a wide divergence in market valuations, which makes the outlook challenging. There are areas of high risk, such as US equities, tech. shares and cryptocurrencies, and areas of attractive opportunity, such as emerging market equities and bonds, including China and especially South Africa.
MSCI All Country Equity Index
South Africa Equity Index in Rands and US Dollars
Huge disparity in country valuations
Global P/Es per country
A divergence in P/E (price-to-earnings) valuations is justifiable, but the size of the spread is abnormal, evidenced by the US and India at 26.5 and 24.2 compared with SA and China at 12.3 and 9.2 respectively.
The size of your future investment return is often based on the entry point (high or low) of your investment. The graph below shows the future 10-year returns from different P/E entry points. Historical data suggests that entering the US market at today’s high valuation will result in zero returns over the next decade. This is singularly due to entering the US market at a high valuation level.
High P/E valuations translate to low long-term returns
Currently, the US comprises 70% of the global equity market, with the “Magnificent Seven” accounting for a staggering 20%. Excluding the expensive US market, the rest of the world trades at a forward P/E of 13.3x. With the beginning of a declining interest rate cycle likely to stimulate economic growth, the global equity market excluding the US looks reasonably priced.
MSCI All County Index (ex US) forward P/E ratio
AI (Artificial Intelligence) the main investment theme of 2024
AI emerged as the dominant investment theme of 2024. Any company that could be associated with AI had its share price rocketing up. Most notably Nvidia, the manufacturer of specialised AI chips.
Nivida and Cisco share prices
Warning bells should be rung – the run in this new “hot sector” will come to an end. Although the new technology is here to stay, the “eye-watering” valuations are very difficult to justify.
A stark reminder takes us back a few decades, when in 2000, the spike in the Cisco share price on the back of the start of the internet, resulted in a subsequent collapse from which it has taken 25 years to recover.
2025 will be all about Trump
The likelihood of 2025 being all about Trump is real; brace yourself for a potential wild ride. This does not mean everything is a sell, as there are many attractive investment areas. However, it does mean that “market noise” will be elevated, fuelling uncertainty, and consequently, promoting volatile investment markets.
Trump has a very tough balancing act
Deregulations, tax cuts, tariffs, immigration, curbing government spending and omnipresent global political posturing remain on the cards. Each holds varying degrees of positivity and negativity for the US and global economy, and investment markets.
But it’s all about Trump and the legacy he wants to leave, which is a strong US economy represented by good growth with the bonus of a strong stock market. Accordingly, anticipate that all his actions and policy changes will be focused on these outcomes.
Large tariffs and significant immigration cuts are likely to be inflationary and will drive higher interest rates, which are detrimental to economic growth. Conversely, deregulations and tax cuts will stimulate economic growth, although reduced government spending will slow growth and temper inflation.
We believe Trump will adopt a more discerning approach to his actions compared to his rhetoric. Four years is a relatively short time for an economy to adapt and benefit from some of his more radical proposals, such as high tariffs. However, we anticipate that Trump will ultimately have a net positive impact on the US and global economies. It is likely he will primarily use his radical policy changes and views as leverage to negotiate stronger positions for the US on the global stage.
Globally, economies are at a crossroad
An abnormally resilient US economy, a Chinese economy battling to grow its consumer spending, Europe and UK economies in dire need of reform to grow and Emerging Market countries waiting for a return of meaningful foreign investment appear to be the order of the day.
The US economy has been resilient in this higher interest environment with inflation not declining as expected, which is partly due to high government spending that has propped up the job market. This spending is likely to be curtailed soon. The market view has recently changed to US inflation staying higher longer, which has seen bond yields rise sharply indicating that the interest rate cutting cycle could be paused in 2025. This is not good for US equities. The market is currently pricing in two 25 basis point cuts in 2025 and 2026.
The crossroad is, will higher projected interest rates undo the resilient US economy, leading to a market correction? This could lead to changes in global equity strategies given the significant valuation disparities across sectors and countries.
Geopolitical tensions remain high
The widening global East – West factions continue, fuelled mostly by a strengthening China, in our opinion. Hopefully Trump can reduce tensions and return some rational economic fair play that will not only benefit the US, but other markets too.
SA’s economic and investment prospects are good
After the positive election result last year, the new GNU (government of national unity) has remained intact and appears functional. Part evidence is the positive progress with Operation Vulindlela where most of phase 1 has been completed.
Key to SA’s improvement is the GNU’s continued existence with the ANC and DA maintaining a working relationship. However, top of mind for investors, is who is going to succeed Ramaphosa at the ANC. Currently there appears to be no obvious candidate.
Economic growth should do better than expected
Despite ending the year with a disappointing decline in the PMI (purchase managers index), the economy is poised to grow more than the average forecast of 1.7% p.a. for 2025 and 2026.
Firstly, business and discretionary retail confidence are at near 10-year highs going into 2025.
Secondly, the lack of growth over the last 10 years means the economic base is low and small improvements can translate to much bigger gains such as:
- The end of load shedding which could add a potential 2% to GDP growth.
- The two-pot system is estimated to inject R50bn into consumer spending.
- The improvements at Dept of Home Affairs and clearing of the 300K work visa back log should add 0.5% to growth.
- Rail and Port improvements are reducing serious logistical bottle necks.
- Lower interest rates down 2% by end 2025 from peak last year is a major boost to the consumer and business.
- An increase in government infrastructure spend: “turning SA into a construction site”.
Finally, positive sentiment from a successful G20 summit, the possibility of a removal from the FAFT grey list for monitoring and a probable improved credit agency rating, will all bode well for an increase in foreign investment.
Our view is that SA GDP growth will exceed 2% in 2025 and will track closer to 3% in 2026 and 2027. This would see the much-feared government debt to GDP declining, employment increasing, a material inflow of foreign investment, a stronger currency and superb local investment returns.
The Rand is expected to strengthen again
After the Rand/Dollar exchange rate rallied strongly in 2024, moving from 19.2 to 17.1, it reversed in October and recently spiked back to 19.1. This reversal was largely driven by a resurgent US Dollar following Trump’s election as President, alongside fears of negative effects on Emerging Markets.
As usual, the Rand weakened disproportionately due to its high liquidity. See its relative movement to other Emerging Market and Commodity currencies below.
Rand vs Emerging Market and Commodity currencies
The Rand’s fundamental value against the US Dollar (R/$) is determined by purchasing power parity (PPP), which reflects what R1 can buy compared to 1 US Dollar. Our model currently estimates PPP to be around 14.6.
However, due to economic risks such as high debt, low growth, and a dysfunctional government, a risk premium is added to the PPP valuation, ranging from 20% to 30% as these risks fluctuated.
With the formation of the GNU, there is some political confidence and positivity surrounding SA’s economic growth prospects, which is key to stemming our high level of debt. This reduces our risk of a debt-spiral-crisis and should return some normality to the value of the Rand.
As these risks are mitigated, particularly the removal of the debt trap with improved growth prospects, the risk premium should decrease, leading to a stronger Rand. Historically, this premium has even fallen to zero, but that only occurs in exceptionally favourable conditions, and evidence of such a scenario might take time to emerge.
We believe that a stable governing coalition (GNU) adhering to the ANC/DA agreement could propel the Rand near 17 against the Dollar over the next year.
The Prosperity Fund continues to produce superb returns
The fund had a superb 2024 returning 19% as it capitalised on strong local equity and bond growth leading on from the positive election result. Over the last 10 years, the fund has returned an average 10% per annum, compounded return.
Prosperity fund performance since inception (19 Sep 2014)
| 1 Year | 3 Years | 5 Years | 10 Years |
| 18.9% | 12.8% p.a. | 10.9% p.a. | 10.0% p.a. |
Its unique investment management style primarily involves taking short-term tactical positions in asset classes that are irrationally priced, based on a combination of top-down and bottom-up fundamental research. To a lesser extent, longer-term strategic positions are included when major market opportunities are identified.
The fund prioritises capital preservation through conservative management. It caters to investors seeking a balanced portfolio with local and international exposure, offering consistent investment returns. It represents Investonline’s in-house investment market views, which we attempt to replicate over our different investment risk strategies for our clients.
Investment Strategy and Outlook
Global markets are likely to be volatile in 2025 as the Trump rhetoric is unsettling and difficult to interrupt.
Remember: taking advantage of volatility or trying to time markets is very difficult and often detracts from good, long-term performance. The first port of call is assessing global equity valuations, which are not expensive, barring US equities, and given that we have entered a declining interest rate cycle.
Overall, we prefer Emerging Markets, as the valuations are low and the interest rate cutting cycle has started, which favours the sector.
We remain positive on SA equities as their valuations are attractive and that economic growth in 2025 and 2026 is likely to be better than expected. This will drive much needed foreign investment inflows, especially in SA Inc. sectors.
SA equity forward P/E valuations
Review your Investment Strategy
With widening global investment valuations, ensure that your investment portfolio is correctly balanced and adjusted to suit your personal risk profile to achieve your goals. Check that your financial plan is up to date. It is critical to ensure that the risk you take in your investment portfolio matches your financial plan, especially when nearing or during retirement.
