KEY TAKEOUTS

• Trump's tariff policies risk higher inflation, reduced US growth, and are driving an end to period of US exceptionalism in US markets.
• Market volatility will intensify as uncertainty grows between Trump's rhetoric and actual policy implementation.
• Diversification is key, with gold, Japanese yen, and defensive global assets favoured; US bonds are increasingly unattractive.
• Global (ex-US) equities preferred, especially undervalued Chinese tech and consumer sectors, due to trade resilience and shifting capital flows.
• South Africa shows resilience, but remains vulnerable to global shocks; select local and offshore equities may outperform in Trump 2.0.

Going into 2025, US equities surged off the back of expectations that Donald Trump’s election victory would attract increased capital to the US economy. As Trump continues to announce tariffs impacting US trading partners and the future of US exceptionalism becomes increasingly shaky, this optimism appears to be rapidly fading with global markets facing almost unprecedented geopolitical and economic shifts.

The policy objective under Trump is to reduce and reverse much of the spending and regulation enacted under Biden and further deregulate key, with the aim of crowding in the private sector, arresting the debt decline and reducing inflationary pressures.

This objective appears perfectly reasonable when looking at the context that has led to today, however, the tools Trump is deploying to address the issues facing the country are blunt, often pointing in opposite directions, which run the risk of generating a stagflationary shock both domestically and for the rest of the world.

Against this backdrop, key market trends are emerging that investors will need to closely observe in order to find compelling global investment opportunities. We have listed our top five factors to watch below.

1. Tariff policy travesty

When it comes to his more erratic presidential style, Trump is to be taken seriously, but not always literally. This applies in particular to tariffs which are being used in part to extract concessions from trade partners.

While tariffs typically benefit a few protected industries, they inevitably lead to higher inflation and costs for consumers and erode discretionary spending and consumer confidence, hurting the many in the pursuit of driving up fiscal revenue and extracting concessions.

Combined with Trump and Musk’s rapid spending cuts, the net effect of Trump’s tariffs is most likely to be rising uncertainty leading to lower US growth, in addition to limited improvement in the debt path, upside risk to inflation and a Federal Reserve balancing the risks as opposed to cutting interest rates. While the forecast risks are particularly high given the large scale and mix of various policies, the probabilities have shifted away from the strong US exceptionalism we saw in the 2010s.

2. Expect ongoing volatility and uncertainty

While many investors deduced that Trump’s tariff threats were merely a negotiating tool to force concessions from targeted countries, global markets have been left shaken by Trump’s decision to follow through on the implementation of some of the more significant tariffs. A fierce trade war and harmful economic consequences, both in the US and globally, are now looking increasingly likely.

As such, we expect more volatility as the market digests what Trump says versus the downstream impact of what is actually implemented. We further expect this uncertainty to delay planned investment and consumption in the real economy, directly impacting growth.

3. The case for global diversification is growing

This environment increases the premium for diversification, and in particular defensive assets which offer independent strong themes. We have specifically identified the following opportunities:

• We continue to like gold, as it benefits from rising policy uncertainty, downside risks to growth and the potential for a tariff-induced inflation shock.
• We also like the Japanese Yen, which is undervalued, with improving fundamentals, as well as being a natural beneficiary in a world where tariff’s trigger recession risks.
• On the flip side, we dislike US bonds. The poor fiscal dynamics and flatness of the curve on one hand, and reliance of the US on external capital leave the asset class more fragile than it has historically been.

4. Global ex US assets over US assets

Should Trump’s trade threats result in a full-blown trade war, both US and non-US equities are set to perform poorly. However, we see the largest risks in the US equity market, which remains priced for perfection despite the recent market sell-off.

We think there are better places to shield portfolios from this risk, without meaningfully sacrificing growth. China’s consumer and technology shares, for example, have faced a multi-year period of foreign outflows, are under owned, are more shielded from trade-related risks, and benefit from a cyclical and longer-term rebalancing of the Chinese economy towards domestic consumption and services.

They are also likely to benefit in a world where trade risks are de-escalated and normalised, as money is likely to flow out of the US, presenting a favourable skew to their US counterparts.

5. Domestic markets are on the rise, but not strongly enough to be immune

• South Africa’s growth is on a path to recovery. However, reform is not strong enough or rapid enough to allow SA to stand on its own feet in the face of rising global uncertainty. We therefore remain dependent on a favourable global environment.
• Following the substantial convergence in bond yields to the US over the last year, our domestic bonds offer less value today and are exposed to rising global bond yields should tariffs result in an inflationary shock.
• We expect our equity market to be more resilient – thanks to cheaper valuations, and a favorable composition of some of the winners in a Trump 2.0 world.We specifically see opportunity in the Chinese technology, gold and gold miners and defensive rand hedge shares, and have meaningful exposures to these stocks across funds.