In such tumultuous times, it is hard not to get caught up in sensational headlines and market gyrations. The danger is that we allow our emotions to taint our decision-making, and it is also in our nature to extrapolate recent experiences and be overconfident about our predictions for the future. Our team is mindful of these behavioural biases and instead of allowing ourselves to be whiplashed by each headline, we unemotionally try to assess what matters to investment markets and carefully consider the implications of these developments. While headlines change on a daily (sometimes hourly) basis, in the world of politics, it is policy that matters, not rhetoric.

Recent events provide us with timely case studies to juxtapose and analyse the policy/rhetoric dichotomy: the Government of National Unity (GNU)/Budget standoff and tariff changes announced by the US. Both developments have impacted asset prices in the short run, but in order to gain better insights into how much they are likely to matter in the long run, we consider both in an unemotional and evidence-based fashion.

Notably, we have seen no material change in policy direction in SA, while the US is undertaking some of the most dramatic policy changes of the past century. Importantly, significant policy risk has been priced in already by the SA market, while investors appear to be extremely complacent about the risks in US markets.

Budget 2025: The first real test of a fragile coalition government

The recent GNU Budget impasse clearly represented a setback that challenged the stability of an already fragile coalition government. Local asset prices responded by giving up some of the ground they gained following on the election results, and the rand weakened as risk concerns weighed on the minds of investors. After weeks of uncertainty, the second version of the Budget announced in March and contentious 0.5% increase in value added tax (VAT) were withdrawn. The third iteration of the National Budget was expected to be tabled on 21 May 2025 (at the time of writing).

Painful trade-offs complicate decision-making
It is clear that South Africa urgently needs to find a workable solution to the fiscal bind it faces. Government debt needs to be tightly controlled or, preferably, whittled down from its current levels. No doubt, it is a difficult policy tightrope to navigate, and as is clear from the Budget standoff, there is no easily agreed-on path on how to manage the often painful trade-offs that are needed to achieve these objectives. What the GNU parties still seem to agree on, however, is that fiscal discipline is needed. The disagreements seem to primarily arise in terms of the ‘painful trade-offs’ that need to be made.

Undoubtedly, the standoff has strained already tenuous relationships in the GNU further and, of course, politics seldom transpires without some mudslinging. Despite this, we still see commitment to the reform agenda, and we expect reforms to continue to proceed, albeit much slower than most of us would like. Structural reform remains a key building block to growing the economy, which is the most viable solution to resolving the severity of our fiscal constraints. Furthermore, fragility in the governing coalition impedes a much-needed focus on improving the efficiency of government spending. Unless we see the two large parties starting to find more common ground, it is reasonable to expect market participants to question whether the GNU will see out its full term in its current form.

How this impacts the outlook for SA assets
Domestic assets including the South African rand (ZAR) endured a sharp sell-off amidst the Budget impasse and started to offer good value again, and our funds added to domestic equity exposure. Our assessment of valuations suggested that the risk premium embedded in local bonds and equities offered an attractive margin of safety and thus a buffer against negative events. Local assets continue to price in dire outcomes via very high real yields, so outcomes that are ‘less bad’ than expected can see excellent returns. The 2024 post-election relief rally provides a good example of how powerfully assets can rerate when sentiment improves from dismal levels.

Returning to the local outlook, our current base case is for a continuation of the recent status quo: poor governance in key areas of the economy such as local government will continue to impede economic growth potential, ongoing (albeit slow) reform in key sectors of the economy such as power, logistics and infrastructure, and an economy that continues to bumble along at growth rates that are well below potential. Importantly, we expect the global backdrop to turn more favourable for commodity-exporting emerging markets like SA over the medium term, though headwinds from the tariff war are likely to weigh on global growth and drive uncertainty in the immediate future. Additionally, we see room for further rate cuts, which should support domestic consumption and boost investment spend. Despite the noise, we have seen no changes in domestic policy that erode the value of local assets. Given current low prices and high yields, we should continue to see good returns from local assets, despite the endemic uncertainty of the local political landscape, and bearing in mind that the risk premium attached to local assets often handsomely compensates investors for this risk.

US trade policy: significant changes are afoot

By contrast, the Trump administration is invoking sweeping new policy that is clearly material to future economic outcomes and asset returns. International relations and trade are being dramatically altered, in turn changing the world order. The ‘America first’ approach speaks to a pivot to nationalism, a reversal of globalisation, and the emergence of a new multi-polar world order.

So far, President Trump has not been methodical or consistent in his pursuit of policy. Desired policy outcomes sometimes appear contradictory, while the policies implemented to achieve them are haphazard and may have unintended consequences. For example, he wants more oil production (“Drill, baby, drill!”) but also wants a lower oil price, even though producers may not find it economically viable to produce oil at lower prices. He wants a slimmed down state bureaucracy, but by gutting government agencies and withdrawing funding from educational institutions and scientific research, he may be undermining US competitiveness in the long run. In addition, his policies are directed at allies and adversaries alike, upending the relative stability of alliances built over several decades on the Washington consensus and the US’s role as a global and financial hegemon. Tariffs in particular, seem to have been based on a questionable formula and equally questionable assumptions, without giving due consideration to the reality of globally integrated supply chains. Risks of a US recession have increased, and consensus is that should this materialise, it would largely be as a result of an ‘own goal’ given policy changes by the US government.

Uncertainty is a killer
The Trump presidency has introduced unprecedented levels of uncertainty, not only in global relations but also in markets. While Trump values unpredictability as giving him the upper hand at the negotiation table, businesses find it difficult to plan or operate efficiently when policy measures are announced, paused or reversed on whim, and markets (and investors) notoriously hate uncertainty. We are expecting tariffs to settle at more reasonable levels once the implications of the initial proposed rates become clear. However, we cannot see an easy return to the political and trade relationships of the old world order – the damage has been done.

A notable feature of the market's reaction to the ‘Liberation Day’ tariffs of 2 April has been significant weakening of the US dollar, confounding the expectations of many market analysts. Furthermore, while US equity markets have borne the brunt of uncertainty and rising recession concerns, bonds have not responded as most expected. Bond yields rose while economic expectations deteriorated − an unusual occurrence over the past four decades. This is an important development and potentially signals that investors are re-evaluating the attractiveness of US treasuries given high levels of government debt and rising policy uncertainty. While US bonds were often considered risk-free assets in the past, rising bond yields may signal that a risk premium now applies.

Importantly, it looks like the death of the US exceptionalism narrative − which has been long overdue in our view − may have been hastened by the very poor execution of an ideology that has significant long-term implications. Some of the drivers that have served to underpin US exceptionalism to date may become headwinds. The US fiscal position is likely to see the country’s ability to stimulate a flagging economy being constrained, while capital flows could slow or reverse as the world weighs their collective overexposure to US assets following several decades of increasing market concentration and 15 years of US outperformance dominated more recently by mega-cap tech stocks. Furthermore, US investors are now also incentivised to diversify their portfolios in favour of other international opportunities. And importantly, we expect the reversal of capital flows to coincide with a passing of the global growth baton from the US to Europe, China and other emerging markets, being countries which have the fiscal and monetary space to stimulate domestic consumption and investment spend. The recent weakening of the US dollar is also very important: the decade-plus dollar bull market went hand in hand with outperformance by US assets. A reversal in that trend, which we expect, has historically been a material tailwind for growth in emerging markets and commodity prices.

The genie and the bottle
The policy changes that President Trump has set in motion may prove impossible to reverse, whether that is due to a change of heart by the current administration, or a subsequent one. Financial markets are built on trust, and the Trump administration’s open disdain for long-standing allies, coupled with a willingness to impose penalties on friend and foe alike, will undoubtedly lead many countries to reconsider their global relationships and alliances. The safe-haven status many US assets have enjoyed in the past is no longer unquestioned.

In contrast with SA assets, US valuations remain elevated relative to history, indicating a high level of complacency that the US exceptionalism narrative will persist. Specifically, this will require continued robust growth in the US economy and ongoing capital inflows from foreigners to fund the twin deficits.

The consequent recalibrations in the world economy and markets will likely play out as a multi-year trend. We are likely to see a weaker US economy, as America runs out of scope for continued fiscal stimulus that has underpinned US outperformance for so long, and as markets become more sensitive to the volume of US debt being placed. Consequently, we expect US bond yields to remain higher than in the past, while we are likely to see a continued capital rotation out of over-owned US assets. Value may finally triumph over growth assets, after more than a decade of taking a backseat.

In short, we see a market environment ahead that looks substantially different to that of the past, and one which favours active managers who have a proven track record of shopping in uncrowded waters. Importantly, investors need to be cognisant that we have seen an immense exposure to US assets being baked into market indices over the past decade, and they need to take an active approach to ensure their portfolios are positioned appropriately to navigate the environment that lies ahead.