Would this 2025 outlook have been different if US voters did not swing decisively to Donald Trump and the Republican Party. The short answer: yes! The longer answer: it depends.
We know more or less what Trump promised on the campaign trail, but we don’t know the when, where and how. Even a Congressional majority doesn’t mean everything will be rubber-stamped. Trump does not need to run for election again, but Joe Soap Congressman will have to face the voters in a mere two years’ time. There will also be substantial lobbying from business leaders not to alter the status quo too much or too quickly.
Nonetheless, we are probably looking at a world where tariffs will be increased across a range of imported goods, with affected countries possibly retaliating with import taxes of their own. This points to higher prices and input costs. We are also looking at a negative impact on labour supply. Immigration is a political hot potato across the world, but the US needs migrant labour as the native-born workforce is no longer growing. Tax cuts will probably only come towards the end of 2025, benefiting current workers and owners of capital at the expense of future generations. Trump appointed Elon Musk to slash government spending, but Musk is likely to run into political realities very quickly. Therefore, lower tax rates will largely be funded by borrowing, pushing the US government-debt-to-GDP ratio even deeper into triple digit territory, and putting upward pressure on bond yields.
To outsiders, the US economy seems in good shape, certainly compared to other major economies. But beneath the rosy surface there were clearly enough people who were unhappy with the state of the economy and their personal finances to vote the Democrats out of office. This was a trend across the many elections held worldwide in 2024 – incumbent parties lost votes on an unprecedented scale.
Therefore, one of the big questions for 2025 is whether these cracks in the shiny façade of the US economy will widen or narrow, and what role the new administration’s policies will play?
This is something the Federal Reserve will pay close attention to. The Fed is likely to cut a few more times but will proceed cautiously. Even before the election, hints of inflation stickiness caused the market to scale back expectations for rate cuts in 2025. Inflation risks have increased since, but the Fed is in an awkward spot. It knows something is coming but cannot respond to the impact of policies that have not been implemented yet.
In China, the world’s number two economy, the bias very much remains towards additional policy easing. However, lower interest rates cannot adequately address the country’s economic malaise. When there is too much private debt, lower interest rates only ease the repayment burden, they do not stimulate the fresh borrowing and spending needed. The government needs to be the borrower and spender of last resort in such a situation. We will see in 2025 if Beijing steps up to deliver this. Until now, China has tried to export its way out of economic weakness, but this is clearly going to become more difficult. Meanwhile, the full power of China’s consumer base remains untapped. The looming headwind of US tariffs might be the impetus needed to overcome resistance to deeper reforms and more effective stimulus.
In the Eurozone, the third major economy, 2025 will kick off with a deep sense of unease. The war on its eastern doorstep still rages, and the US could well leave it to shoulder the full burden of supporting Ukraine. Germany, the largest state in the Eurozone, is batting with political instability while flirting with recession. Europe feels leaderless at a time when its challenges – an ageing population, lagging competitiveness, a lack of technology champions, fragmented capital markets, over-regulation – will be underlined by Trump’s ‘America First” approach. There is simply no equivalent “Europe First” thinking. This suggests that the European Central Bank will once again have to carry the policy load, pointing to deeper interest rate cuts. As the interest rate gap with the US widens, the euro is likely to remain under pressure against the dollar.
From everything described above, it does seem that the US equity market will have the wind at its sails from an earnings growth point of view – certainly compared to other major markets – though some of Trump’s policies could counteract others. But from a valuation point of view, US equities are already expensive. The dilemma investors have grappled with for a few years now, whether growth or valuation offers the better bet for future returns, will become more acute in 2025.
Turning to South Africa, after 2024’s watershed election, 2025 is the year we want to see the government of national unity (GNU) delivering with greater urgency. There has already been significant progress on electricity and for the first time in years, you will be able to make your Christmas roast without obsessively checking the loadshedding schedule. We now need to bring private investment into the country’s creaking port and rail network. Water provision is also increasingly an economic headwind. Nonetheless, 2025 could be the first year since 2013 (apart from the 2021 Covid-rebound) that the local economy posts 2% growth.
If things go according to plan, 2025 could also be the year when the government debt-to-GDP ratio peaks. This would be an important milestone, and a stepping stone to credit rating upgrades. Many other countries, notably the US, have rising debt ratios. Demonstrating debt stabilisation should therefore be positive for South African government bonds at a time when there is likely to be some upward pressure on international bond yields.
The Reserve Bank is likely to continue reducing the repo rate as domestic inflation looks set to remain on target during 2025. Of course, our central bank will keep a close eye on what the Federal Reserve does, but so far there is no reason to scale back what were already conservative expectations about the path of South Africa’s short-term interest rates. The repo rate is still likely to settle around 7%.
Much will obviously depend on the rand-dollar exchange rate. On the one hand, there is a broad consensus that Trump’s policies point to a stronger dollar, though ironically, he favours a weaker dollar to support American businesses. Indeed, the rand was on the back foot in the days after the US election. On the other hand, the rand should benefit from a better domestic growth outlook which will improve foreign investor interest in South Africa. It should also be noted that the dollar is already strong while the rand is already on the weak side. This limits the potential upside for the former and downside for the latter. Importantly, the rand never moves in a straight line. But is still likely to zigzag its way towards a stronger level during 2025.
South African equities are exposed to all these trends, since it is a mixed bag of rand hedges, domestically focused-companies and miners. Overall, JSE-listed shares have the benefit of a cheap valuation and an improved earnings outlook. However, equity investing is never a one-year thing. Investors should not just think about 2025 but also the years beyond that. We’ve got four years of Trump ahead of us, but our portfolios need to perform long after he has left office.