Dirk Jooste, Fund Manager at PSG Asset Management

It feels like more has happened in markets in the four months since President Donald Trump’s election victory became clear, than in the previous four years, put together. Not since the early days of Covid-19 pandemic have we seen such large and unexpected moves in markets. Interruptions or apparent reversals of previous market trends seem to be following in short succession.

Times like these can be exhausting, as investors have to navigate the cacophony of market noise while sorting false signals from those that could indicate a genuine change in the underlying long-term market outlook. Amidst this uncertainty, the challenge for local investors remains no less urgent: maintain and build your wealth in a way that reliably outpaces inflation, despite volatile markets. What should investors be aware of, as they go about trying to meet this challenge?

SA markets are not isolated from developments in the rest of the world, and global market movements will impact both SA equities and bonds. However, the relative starting point (valuations) and initial price paid for an asset matter a great deal. International diversification remains important and we continue to add to global opportunities selectively, but we believe select local equities still offer potential for further upside despite a good run post the formation of the government of national unity (GNU) – although the journey is likely to be choppy for sure. Even a mild improvement in local trading conditions – be that from lower interest rates, a continued abatement of loadshedding, mild improvement at ports or a combination of these – could improve the earnings for local companies. That said, the ones most likely to benefit from such improvements are the true ‘SA Inc.’ and medium capitalisation stocks, rather than large index components which have already benefited from the rotation into SA assets. As investors have more recently started to move away from a TINA (there is no alternative to the US and Mag 7) to an ‘anywhere-but-America’ mindset, we also need to consider the possibility of global investors returning to the JSE in support of equities. Such a reversal in trend could lend further support to local asset prices, even as risks remain.

Nonetheless, we believe there will be substantial opportunity costs for investors who opt to hold cash out of fear. The returns on offer from local fixed income assets are well in excess of those available from cash, and well ahead of current inflation rates, which we expect to remain contained for 2025. While inflation protection must be sought from equities in the long run, especially given the prospect of higher inflation rates for longer, there are currently high real yields available to local fixed income investors. For example, local bonds are currently offering nominal yields of around 10% to 11%, which translates into real yields of around 6%. This is well in excess of their long run average of between 2% to 3%. Negotiable certificates of deposit (NCDs) and high-quality credit also offer nominal rates of between 8.5% and 9% for the year. We anticipate that listed property, which is sometimes included in multi-asset income portfolios, will likely have a more tempered year from a return perspective compared to 2024, given the potential for a shallower rate cutting cycle, but they too offer the prospect of real returns.

Source: PSG Asset Management, BER and Bloomberg

However, while we are positive about the returns on offer from local fixed income markets, we are highly cognisant of the valuable lessons last year offered and are taking these with us as we seek to manage portfolios in 2025 and beyond. The FTSE/JSE All Bond (ALBI) Index delivered a phenomenal return for 2024 in excess of 17%, but saw negative returns in four months, with large negative monthly returns in March and October as global interest rate expectations started to change. Thus, while we believe fixed income markets are still positioned to deliver good real returns to investors, the return path will not be smooth, and therefore it is critical that investors partner with an investment manager who has a successful track record of managing downside risk, particularly in their fixed income portfolios.

From a broader perspective, it should also be clear that there are upward risks to the global inflation outlook, and that policy uncertainty has increased. While equities – both local and global – remain important in constructing a well-diversified portfolio, especially for investors with a longer investment horizon, returns are likely to be very volatile in 2025. Amidst this uncertainty, local investors are in a privileged position where they can still look forward to real returns of 6% on offer from the local bond markets and can use this element to help secure positive returns in what may otherwise turn out to be a trying year.