What happened in the first quarter?
Since the start of 2025, financial and economic developments have been centred on just one global political figure: the President of the USA, Donald Trump. Surveying news, it’s hard to find a headline not dominated by the change brought about during his short but disruptive presidency.
Of all the changes introduced by President Trump, his tariff policies have been the most disruptive. They have destabilised global trade and created friction with old allies like Canada and their largest trading partner and perceived enemy, China. The implementation of some of the initial tariff announcements was reversed or postponed.
This stop-start policymaking has increased global uncertainty and shaken the confidence of American consumers and businesses. For example, the NFIB Small Business Optimism Index fell to its lowest level since October 2024, marking the largest decline since June 2022.
The graph below shows the NFIB Small Business Optimism Index:
The events of the first quarter were overshadowed by developments on Liberation Day when Trump announced a 54% tariff on all Chinese imports, sparking a trade war. Trump placed import taxes of 145% on China while China retaliated with 125% tariffs on all US goods. The Trump administration has recently indicated that tariffs on Chinese goods will be reduced, but not to zero. By the time you read this, it may be something completely different.
Not surprisingly, President Trump attacked the central bank's independence in unprecedented fashion by criticising the stalling of interest rate reductions. The bank is concerned about the impact of tariff increases and other policies on inflation and employment.
Usually, such unusual policy uncertainty would cause a flight to safe-haven assets, such as gold, the US Dollar, and US Government bonds.
Policy instability has undermined the safe-haven status of US assets, leading to a rise in government bond yields (which caused bond values to decline) and a depreciation of the dollar against most major and emerging market currencies. The Swiss Franc, Swedish Krona, and Euro have all gained significantly against the US Dollar this year.
However, gold, seen by some as the ultimate safe-haven asset, has continued to rally to historical levels, as can be seen in the chart below:
Source: Portfoliometrix
South African developments
For once, the news from the USA has even overshadowed dramatic developments in South African politics.
The first cracks in the Government of National Unity appeared when the Democratic Alliance refused to agree to a 2% VAT hike in the annual budget. Dramatically, the budget was delayed at the last minute. A revised budget tabled a month later reduced the VAT rate to 0,5%.
While finalising this newsletter, the VAT increase was withdrawn in another dramatic turn of events. Treasury must now table a new plan to fund the gap, and spending cuts will likely be tabled.
The agreement about the VAT change did not involve the DA. It is unclear whether the GNU will continue in its current format. However, it is encouraging that other small parties have gathered to engage in the democratic process and that an economically friendly outcome has been achieved.
South Africa also finds itself at the centre of President Trump’s attention because of the empowerment and land appropriation policies related to the redress of past injustices, as well as the South African government’s position on Israel.
All this uncertainty has once again dented South African growth prospects. Consumer and business confidence, which briefly picked up after last year's elections, slumped again.
Such low confidence meant that inflation remains under control (3.2%), and our trade balance has strengthened. Under normal circumstances, these conditions would lead to further interest rate reductions, but the Rand’s weakness against the Euro and other currencies might stall this process.
Global economic growth will likely slow down, and a global recession is possible. In this situation, predicting what will happen to inflation is hard. If tariffs continue, inflation may rise. However, lower demand for goods can keep prices from increasing. Oil prices, which play a significant role in global inflation, are already decreasing.
What’s happened in financial markets during the quarter?
Source: Portfoliometrix
Despite the turmoil in the first quarter, financial markets delivered relatively stable results. These hide the intra-quarter fluctuations. Of note is the relatively good returns from local equities, driven primarily by resources shares (+28%). Gold and platinum companies were the stars of the show. Additionally, the Rand strengthened against the US Dollar, and SA Equity outperformed US Equity when measured in Dollars.
After quarter end, US Equity declined by a further 5%, while local shares made small gains, boosted by the continued commodity run.
This year, these developments resulted in marginal positive returns for most of our clients’ portfolios.
What to do about your investment strategy?
When we choose an investment strategy for our clients, we keep in mind that investment markets can be unpredictable. It’s common to see significant drops in value over one or three years.
The graph below shows how global share prices, represented by the MSCI World Index, have changed over time. Global markets can rise and fall by 50% over any one year. However, it is rare for equity markets to deliver negative returns over five years or more.
Source: Ninety One, FactSet, 31 March 2025
Other asset classes, like bonds, property, and cash, are even more resilient because they produce more income and rarely experience negative returns, even over a short period.
A combination of all these asset classes, locally and offshore, produces a robust portfolio that can withstand challenging conditions.
In addition, we always advocate for clients to keep money market accounts with enough to cover at least a few months' expenses. We encourage clients already in the withdrawal phase to keep even more liquid funds on hand.
Therefore, our strategies are designed for clients to remain invested over long periods—they can only work if we all remain invested in them.
During any financial, political or economic crisis, our advice is always to remain steadfast with the strategy. In this current turmoil, there is even more reason to do so because the uncertainty is caused by the instability of government policy, here and abroad.
The market swings are unusually wild due to the unusual policy changes. In some way, the market’s response to the extreme policy decisions has caused policymakers, including President Trump, to review their strategies. The market’s reaction to the Liberation Day tariff hikes is probably why some tariffs are being dropped and others reviewed. The same is true of the VAT increase in SA.
There is no doubt that the world order is being changed. A post-Trump world will look very different. We can speculate about the potential outcome – it makes for good dinner party conversations – but even if we predict the outcome correctly, it is impossible to predict how asset values will change due to that outcome.
Read the full PortfolioMetrix quarterly local report here, and the full quarterly offshore report here.
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