From tailwinds to turbulence

"History doesn’t repeat itself, but it often rhymes." – Mark Twain

In uncertain times, history rarely repeats—but it does rhyme. For over four decades, investors have benefitted from a powerful tailwind: globalisation, disinflation, accommodative monetary policy, and cheap capital. However, that era has started to dwindle, and investors should avoid getting trapped in one of the most persistent cognitive traps in investing - recency bias - the tendency to believe the recent past is a reliable guide to the future.

Today’s environment bears a closer resemblance to the early 1900s than the latter half of the 20^th century. The early 1900s were marked by two world wars, the Great Depression, and the arduous rebuilding that followed. In the late 1900s, there were falling interest rates, rising global trade, and asset price inflation driven by leverage and historically low yields. Where are we today? We have seen a global pandemic, increasing military conflict, deglobalisation, rising interest rates, protectionism, unprecedented levels of sovereign debt, and the waning dominance of US hegemony.  Certainly, reminiscent of the early 1900s. And here is why it is:

• The peace dividend has faded. Global military spending hit $2.2 trillion in 2024. Conflicts in Russia-Ukraine and US-China point to a more unstable geopolitical landscape than the post-Cold War calm.
• Four decades of declining rates may now be behind us. With the Fed Funds rate at 4.5 - 4.75% and structural drivers of inflation (debt, demographics, deglobalisation) rising, the era of ultra-low rates may be over.
• The world is deglobalising. Tariffs, supply chain reshoring, and falling trade-to-GDP ratios suggest a shift toward fragmentation, reminiscent of the pre-WWI world order.

These are the reasons why we cannot still be investing as we were last year or the year before.  We should invest differently by rejecting recency bias. Over the past 15 years, US equities—especially the Magnificent Seven—have dominated. The dollar strengthened. Loose fiscal and monetary policies buoyed growth assets, while developed markets outperformed emerging ones. But markets are cyclical, and the winners of one cycle are rarely the winners of the next.

Global markets: Trump and Tariffs  

The second quarter of 2025 began with a jolt. On what was dubbed “Liberation Day,” President Donald Trump announced sweeping tariffs against major US trading partners. Markets quickly reacted—risk assets fell, volatility spiked, and fears of a global recession returned.

But in typical fashion, confrontation gave way to retreat. A new acronym emerged: “TACO” — Trump Always Chickens Out. Tariffs were walked back, negotiations resumed, and a relief rally ensued.

This led to equity markets surging in the quarter. Global equities returned +11.5% in US dollar, buoyed by expectations of lower rates, a weaker dollar, and a rebound in risk appetite.

But beneath the surface, structural fault lines are forming.

The US dollar fell over 11% in the first half of 2025—its worst start to a year in over 50 years. While this supported commodities and emerging markets, the decline reflects deeper vulnerabilities. The US debt has surpassed $37 trillion, with $9.2 trillion set to be refinanced in 2025, at far higher interest rates than before.

Meanwhile, tariffs are raising the cost of US imports, squeezing households and businesses. This is not traditional inflation—it is a stealth erosion of purchasing power, visible through a falling currency and rising living costs.

These pressures may undermine household resilience, depress real asset values, and fuel populist policy responses—like the recent election of a socialist mayor in New York—that threaten long-term fiscal discipline. In this context, the case for US financial assets becomes increasingly uncertain, not just on valuation grounds, but due to the fragility of policy credibility, the rising cost of capital, and the weakening dollar.

South Africa: A bright spot in an anxious world

Amid global uncertainty (and a state visit to the White House), South Africa emerged as one of the best-performing equity markets in the first half of 2025. The FTSE/JSE All-Share Index returned +29.2% in US dollar, outperforming both the MSCI Emerging Markets Index (+5.5%) and S&P 500 (+5.5%).

It is worth remembering: South Africa is a commodity-driven economy, responsible for over 70% of the world’s platinum group metals (PGMs), used in catalytic converters to reduce car emissions. Though we produce 80% less gold than we did 35 years ago, South Africa still ranks as the world’s 11^th-largest gold producer. When precious metals rise, so do our terms of trade—and our markets.

• Precious metals surged: Platinum +49.8%, Gold +25.9%, Palladium +21.3%.
• Domestic equities rotated into telecoms (+49.8%), tech (+31.9%), and consumer names as the South African Reserve Bank began its easing cycle.
• Local bonds and property rallied on better fiscal data and falling inflation expectations.

But tailwinds can be deceptive. The global system is shifting—slowly but profoundly—from cooperative abundance to structural turbulence.

The playbook of the past—low rates, free money, and global integration—is fading. The next era will demand something else: resilience, selectivity, and an appreciation for real assets and pricing power.

How we are positioned in a world of shifting tides

As the macro landscape evolves—sticky inflation, fractured geopolitics, a fiscal-monetary tug-of-war—we have made deliberate shifts in our portfolios.

We are leaning into resilience and away from fragility.

1. The case for precious metals
We remain constructive on PGMs and selected South African miners. Despite the electric vehicle (EV) transition, demand for combustion engines will persist longer than the market expects. Supply constraints in PGMs are underappreciated. In a world pricing in the end of combustion, we believe the transition will be uneven and slower.

2. South Africa: Cautious optimism
A weaker US dollar and rising metals prices improve South Africa’s terms of trade, with positive implications for the fiscus. Valuations remain attractive (12m forward P/E at 11.4x, one standard deviation below EM), and South African equities are under-owned.

We have allocated client capital to underappreciated quality companies whose true strength is not yet priced in:

• Naspers/Prosus: Benefitting from better capital allocation and Tencent’s structural growth, particularly in AI.
• Bidcorp: A global food services leader in a fragmented industry with consistent cash flow, strong returns, and defensible local scale.
• AB InBev: The world’s largest brewer is emerging from a period of earnings pressure with scope for re-rating.

3. US exposure: Cautious
We remain structurally underweight the US, particularly in mega-cap technology, where valuations appear extended and investor sentiment increasingly euphoric. The Magnificent Seven trade has become consensus, and in our experience, consensus trades rarely deliver outsized forward returns when expectations and pricing are already this elevated. What is more concerning is the growing overlap in capital allocation among these giants. Historically, each of these firms dominated a distinct profit pool—Tesla led EV innovation, Apple controlled the premium smartphone ecosystem, Alphabet owned search, and Meta reigned over social media. But with the emergence of AI, the strategic narratives are converging. These companies are now deploying staggering amounts of capital into the same race—AI infrastructure, models, and cloud capacity. They cannot all win as their current valuations imply. The market is treating them as a bloc of sure things, but history suggests otherwise. When giants chase the same prize, margins compress, competition intensifies, and leadership fragments. The question we must ask is: How resilient is the Magnificent Seven when their futures are tied to the same story?

Performance across our house

Old Mutual Investment Group manages capital across three complementary pillars:

1. Indexation
   • Our Core range continued to deliver stellar performance, with the Old Mutual Core Balanced Fund (7.9%), Old Mutual Moderate Fund (6.7%), and Old Mutual Conservative Fund (5.6%) all in the top quartile for the quarter.
   • Over three and five years: Conservative remains top quartile; Moderate, second quartile; Core Balanced, top quartile over three years and second quartile over five.
2. Quantitative
   • Old Mutual Global Managed Alpha Fund delivered second quartile returns for quarter two, delivering 12.8% vs the benchmark return of 11.5%. The fund has consistently outperformed over rolling three-year periods since its inception in December 2017.
   • Old Mutual Global Islamic Fund underperformed by 2.76% in quarter two but remains a strong long-term performer with meaningful alpha over three and five years.
3. Fundamental
   • Old Mutual Balanced Fund was third quartile for quarter two, returning 7%, slightly underperforming the benchmark with returned 7.2%. A persistent underweight to US equities has been a key drag over the past three years.
   • Old Mutual Investors' Fund underperformed its benchmark in the second quarter of 2025, returning 8.9% vs 9.7%, a third quartile performance. Over the first six months of the year, the fund delivered a good nominal return but lagged its benchmark.
   • African Strategies: Old Mutual Flexible Fixed Income Fund returned 7.5% vs 5.6% benchmark (+190bps alpha), and the Old Mutual African Frontiers Equity Fund rebounded with +13.7% vs 10.3% benchmark (+3.4% alpha).
   • Old Mutual SA Quoted Property Fund has performed in line with its benchmark over the quarter at 10.8%. The fund was second quartile in quarter two and remains first quartile over two, three, five, and 10 years.

Current positioning highlights

We are capitalising on volatility with a disciplined, forward-looking approach:

• Reduced exposure to overvalued US tech.
• Tilted towards Asia (Japan and China) for better valuation support.
• Increased global cash positions.
• Increased holdings in resilient South African multinationals: Naspers, Bidcorp, Richemont.
• Added to PGMs, based on supportive supply-demand dynamics.
• Begun trimming gold exposure after a strong year-to-date rally.

“The future is already here—it’s just not evenly distributed.” – William Gibson.

A fitting reminder that in this new era, opportunity belongs to those who recognise the shifts before they become consensus. As always, we remain committed to navigating this complexity with discipline, foresight, and an unwavering focus on delivering long-term value for our clients.