What happened in the second quarter of 2025?
Political and economic developments in the US continue to drive news flow and the direction of global financial markets, and not because of US economic dominance.
After the “liberation day” sweeping tariff announcements at the start of the second quarter, financial markets suffered significantly. Between mid-February and early April, the S&P 500 slumped by 20% and the volatility index rose to levels seen only twice in the past 25 years.
The initial tariff announcements were postponed or reversed during the quarter, some as soon as 7 days after the announcement. Financial markets recovered and rallied beyond the end of the first quarter’s levels. Many indices ended the quarter at all-time highs. Bonds rallied; the yen, pound and Swiss franc all strengthened against the dollar; and gold surged, up more than 25% year-to-date. After lagging other precious metals, platinum staged a welcome rally and ended the quarter 26% higher.
It illustrates the perils of trying to time the market.
Before markets could relax, Israel’s mid-June strikes on Iran’s nuclear sites, followed by retaliatory missile fire, sent crude higher and rattled nerves. Elon Musk’s much-hyped Department of Government Efficiency (DOGE) pledged $2 trillion in cuts; then he folded as Congress debated a “One Big Beautiful Bill” to add trillions.
However, the US Dollar saw a significant drop relative to other currencies – the first half of the year marks one of the worst performances in four decades. This trend can be interpreted as a loss of confidence in the US as investors shifted investments elsewhere.
Analysts now predict that the long-term cycle of US Dollar strength may be coming to an end. In addition, the US Dollar’s ability to act as a shock absorber is also being questioned. Over the past 15 years, the US Dollar has tended to strengthen at times of financial turbulence, hence providing a cushion for global investors (South African investors have benefited from the US Dollar's strength when global markets decline). However, this trend has also reversed recently.
We may be witnessing the end of US exceptionalism. Over the past decade, the US equity market has dominated global markets. Strong economic growth and innovation drove corporate profits. However, the US reputation as a haven for safety and free trade has been tarnished. Although some of the most innovative companies are still to be found in the US, the world is hedging its bets.
Source: Morningstar Direct, USD, MSCI EAFE NR USD and MSCI USA NR USD, March 2025.
In South Africa, we have experienced the challenges of coalition government. The budget was finalised on the third attempt. The DA and ANC had another spat over the firing of a deputy minister. However, there are some glimmers of hope on the economic horizon – mining and manufacturing have shown some sparks of recovery, and progress has been made to remove SA’s grey listing.
Discussion of lowering the inflation target has had a positive ripple effect on the bond market.
What happened in financial markets?
The second quarter delivered great results for South African investors. The local equity market rallied by more than 10%. While all sectors delivered strong results, resource shares have been the standout performers of this year, achieving another 9% growth following 28% growth in the first quarter.
In general, emerging market equities delivered better returns than developed markets, with nearly 12% growth over the quarter. Within developed markets, Germany and Japan were standout performers, providing returns of 17%. The German equity index ended more than 40% higher than a year ago. The quarter signalled a definite move away from US equities to other developed and emerging markets.
Although the Rand continued its strong showing against the US Dollar, it weakened against the Pound and Euro as investors sought safety in other strong currencies.
What to keep an eye on?
In the US, President Trump continues to pressure the Chair of the Federal Reserve to expedite interest rate reductions. While threatening to replace Powell, the Fed has remained steadfast in its caution against the inflationary impact of the tariff policies. The threat to the Fed's independence is being closely followed by the markets, as political interference with interest rate policies will be viewed as a negative development for inflation and currency stability.
The suspension of most of the US tariff implementation is coming to an end. Although the actual tariff rates are likely to be significantly lower than initially announced and are likely to be negotiated by country, significant uncertainty will still impact consumer and business confidence.
In South Africa, we look forward to receiving feedback from a delegation to determine if we can be removed from the grey list. An announcement is expected to be made by October. This step is significant in removing unnecessary obstacles to foreign investment. We also continue to monitor the government’s projects to restore infrastructure, which has become a substantial impediment to economic growth.
Despite the more-than-usual chaos in the world, financial markets have been delivering such stellar returns. We caution investors to extrapolate these returns into the second half of the year. Although lower interest rates and reasonable economic growth support financial markets, continued geo-political and policy shocks may erode the current positive sentiment.
However, volatility is always a feature of markets. As American educator turned-inspirational author William Arthur Ward put it, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” By expecting volatility, we have always positioned clients’ portfolios to withstand it or benefit from it.
Soon, well-diversified portfolios will be better positioned to withstand the expected winds.
Read the full PortfolioMetrix quarterly local report here, and the full quarterly offshore report here.
<Foundation Family Wealth is an Authorised Financial Services Provider>