From Donald Trump to GNU ructions, market uncertainty has been the name of the game in 2025. What should investors be doing in a time of such flux?
It has been a volatile start to the year for investors, driven primarily by a surge in US policy uncertainty. The early months of President Trump’s return to office were marked by an intense flurry of executive orders, policy pronouncements and public commentary – ranging across trade, foreign affairs, energy and federal employment. Equity markets responded negatively, with growing concern over the longer-term impact of tariffs, public sector restructuring and a generally more interventionist policy stance.
Expectations coming into the year had been constructive: US economic growth forecasts were buoyant, the dollar was strong, and both consumer sentiment and labour market data were pointing to continued strength. There was also cautious optimism that tensions in the Middle East and Eastern Europe might de-escalate. Market narratives centred on a potential new phase of “US exceptionalism”.
But that narrative unravelled quickly. A material sell-off in equities around the globe reflected growing investor discomfort with the direction of policy. The combination of rising inflationary expectations and a weaker growth outlook triggered a repricing of risk, as corporates, consumers and capital markets recalibrated to a more unpredictable macro environment.
Trump’s tariff announcement last week resulted in global markets tumbling at a rapid pace, last seen at the start of the Covid pandemic in 2020.
In South Africa, attention turned to the second round of the 2025 budget process. The government of national unity (GNU) continued to navigate a delicate political landscape. The DA withheld its support for the original budget proposal, opposing the planned VAT hike, which forced a revised draft from Treasury.
The updated proposal introduced a more gradual increase in VAT – 0.5 percentage points in both 2025 and 2026 – down from the initially proposed two percentage point hike. Despite the concessions, Treasury reiterated its commitment to fiscal consolidation, with a key focus on growth-oriented infrastructure investment totalling R47bn over three years. The revised budget projects a slightly higher peak in the debt-to-GDP ratio at 76.2% (vs 75.5% at the 2024 medium-term budget policy statement) but outlines a stabilisation path supported by primary surpluses in the years ahead.
Budget-related uncertainty pushed the South African 10-year government bond yield as high as 10.7% during the quarter, up from 10.5% at the start of the month. However, growing signs of consensus among GNU parties towards month-end helped anchor yields lower on the final trading day.
However, last week, South Africa witnessed the emergence of a major threat to the stability of the GNU. Confidence has been significantly shaken, creating more uncertainty around the domestic recovery reflected in the rand/dollar moving out over a rand to heights of R19.80.
We believe investors should avoid crystallising losses at this point. Panic in the markets can create opportunities for long-term investors because market downturns often lead to stocks and other assets being priced lower than their intrinsic value. For investors who are underweight in equities, some stocks are starting to look appealing. When fear drives prices down, this is often a chance to buy undervalued assets at a discount. However, it’s essential for investors to maintain focus on their long-term goals rather than get caught up in short-term market fluctuations.
In these volatile times, patience is essential. History has shown that attempting to time the market – that is, trying to buy low and sell high based on short-term predictions – is rarely successful. Even experienced investors often struggle with timing the market accurately, as it’s incredibly difficult to predict when the market will hit its bottom or top. In fact, many investors who try to time the market end up buying at high points, driven by optimism, or selling at low points, driven by fear.
Instead of attempting to time the market, sticking to a long-term investment strategy such as dollar-cost averaging (investing a fixed amount regularly regardless of market conditions) has proven to be a more reliable approach. This method allows investors to smooth out the effects of market volatility and take advantage of lower prices over time, without the pressure of trying to predict short-term market movements. In the long run, staying disciplined and focused on fundamentals tends to produce better results than reacting to momentary market swings.
Unlike past market downturns, this one is entirely “man-made”, and a change in policy or direction could lead to a rapid rebound – short-term outcomes are hard to predict.
Hedge funds remain significantly underutilised in South Africa, despite their proven ability to effectively diversify investment portfolios and protect capital during times of volatility and market stress.
Successful diversification involves combining asset classes that have low or even negative correlations with each other, a strategy that hedge funds excel at. Hedge funds are particularly valuable for this purpose because they typically have low or negative correlations with traditional assets like cash, bonds and equities. In times of market stress or volatility, this characteristic can help protect your capital.
Additionally, hedge funds often exhibit low correlations to one another, as each manager employs different strategies involving leverage, net exposure and long/short positions. This allows hedge funds to potentially perform better when traditional markets are struggling, offering a level of safety during uncertain times.
Article from Currency News
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