Bonds and cash strategies are shifting. In response to market volatility, some portfolios are leaning toward high-quality, secured credit and holding moderate cash positions for flexibility.
South African assets require a selective approach. While local equities are attractively priced, political and fiscal uncertainty continue to weigh on sentiment. Exposure to government bonds remains limited.
Global Markets
Global markets extended their recovery through May 2025, building on April’s rebound as geopolitical tensions eased and fiscal stimulus gained traction. The primary catalyst was the de-escalation in U.S.–China trade hostilities.
After April’s dramatic tariff hikes, where the U.S. imposed a 145% duty on Chinese imports and China retaliated with 125% tariffs, negotiations led to a significant rollback. Both nations agreed to reduce tariffs by 115 percentage points, leaving U.S. duties at 30% and China’s at 10%, and committed to an ongoing economic dialogue to stabilize trade relations.
This truce boosted global risk appetite, further supported by the House passage of President Trump’s sweeping “Beautiful Bill.” Approved by a narrow 215–214 margin, the bill aims to extend the 2017 tax cuts, particularly for large corporations, while scaling back federal programs like Medicaid and SNAP.
Despite the Congressional Budget Office and the Committee for a Responsible Federal Budget projecting a $3.1 trillion increase in the federal deficit over the next decade, markets welcomed the pro-growth tilt of the legislation. The bill also includes provisions for unfunded spending designed to buffer sectors vulnerable to tariffs, signalling a shift in Republican fiscal orthodoxy.
Investors interpreted these developments as supportive for earnings and consumption, propelling developed market equities up 6.0% for the month. U.S. equities rose 6.2%, led by industrials and tech, while European markets gained 4.8% in USD terms amid improved sentiment and stabilization in key economies. Emerging markets climbed 4.3%, helped by softer trade rhetoric and modest gains in commodity prices. With inflation still elevated but global trade stress receding, investor focus turns to the Federal Reserve’s next move and the Senate’s reception of Trump’s expansive fiscal package.
Chart 1: Tax cuts are the primary reason that debt will increase (Source: Vox, US Congressional Budget Office)
Global bonds faced significant headwinds in May, primarily driven by concerns over the inflationary and deficit implications of the newly passed US fiscal package. The 10-year US Treasury yield surged sharply, reaching a high of 4.6% mid-month before settling back to 4.3% by month-end. This sharp rise in yields triggered a broad-based sell-off in fixed income markets, with investment-grade and high-yield credit spreads widening modestly.
The sell-off also weighed on the US dollar, which had been on a downward trend since the introduction of the trade tariffs, pressured by expectations that the growing fiscal deficit could limit the greenback’s safe-haven appeal.
Meanwhile, global bond markets mirrored this trend, with the FTSE World Government Bond Index falling roughly 2.3%. Gold prices were volatile but ended the month relatively flat, as higher real yields weighed on bullion’s appeal, offsetting safe-haven demand amid lingering inflation concerns.
Chart 2: US 10- year bond yield (Source: Trading Economics)
Chart 3: US dollar Index on downward trajectory (Source: Trading Economics)
In the United States, inflation slowed to 2.3% in April, it’s lowest since late 2020. While GDP contracted by 0.3% annualised in the first quarter, marking the first decline in three years. The drop was largely due to a surge in imports ahead of new tariffs, which Federal Reserve officials warned could reignite inflation and dampen growth. Although the Fed held rates steady at 4.25–4.50% in June, it signalled the possibility of two cuts later this year. Consumer sentiment improved modestly in June but remains well below average.
In the UK, inflation reached 3.5% in April before easing slightly to 3.4% in May, driven by energy and food costs. The economy shrank by 0.3% in April, while unemployment edged up to 4.5% in Q1. In response, the Bank of England cut interest rates by 25 basis points to 4.25%, balancing persistent inflation with signs of economic weakness. Meanwhile, eurozone inflation fell to 1.9% in May, dipping below the ECB’s target for the first time since September 2024. This strengthened expectations of further easing, as the eurozone economy grew by 0.3% in Q1, supported by resilient domestic demand.
In China, mild deflation persisted for a third straight month in April, with consumer prices falling 0.1% year-on-year. The People’s Bank of China cut lending rates in May to support growth, as Q1 GDP rose 1.2% quarter-on-quarter. The jobless rate declined slightly to 5.1%. Japan’s inflation held at 3.6% in April, with the Bank of Japan keeping rates at 0.5%.
South African equities tracked global markets higher in May, with the JSE All Share Index rising 3.0% for the month. Gains were broad-based across sectors: Financials advanced 2.1%, Industrials climbed 3.9%, and Resources added 2.3%. In the fixed income space, local bonds posted a robust 3.7% return, one of their strongest monthly performances this year, signalling renewed investor appetite for South African assets. The rand also strengthened meaningfully, appreciating 3.4% against the US dollar and 3.0% against the euro.
The revised national budget, tabled in May, reflected a more cautious economic tone. Finance Minister Enoch Godongwana announced the withdrawal of the previously proposed VAT increase, opting instead for a fuel levy adjustment in line with inflation to offset the fiscal impact. The Treasury also projected slower economic growth, lowering its forecast for 2025 to 1.4%, down from 1.8% earlier this year. To support fiscal sustainability, the government unveiled R69.4 billion in spending cuts over the next three years. Key departments like Education, Health, Home Affairs, and state-owned enterprise Transnet are expected to absorb most of the reductions
Chart 4: Budget Summary (Source: Daily Maverick)
Chief Investment Officer, Duane Gilbert’s Commentary
Our market outlook for 2025 remains cautiously optimistic. The prospect of U.S. Federal Reserve rate cuts in a non-recessionary environment presents a broadly supportive backdrop for equities. However, we anticipate heightened volatility in the near term due to lingering uncertainty around U.S. trade policy. In response, we have selectively reduced our global equity exposure to manage potential downside risks.
The U.S. continues to be our preferred investment destination. Following the year-to-date market correction, valuations have become more attractive. We remain confident in the resilience of the U.S. economy, underpinned by robust consumer spending. Additionally, we expect further easing of trade tariffs as the year progresses and anticipate that the economic impact of former President Trump’s tax-reduction policies will begin to materialize in the second half of the year.
While economic performance in Europe and Japan remains subdued, signs of recovery are emerging in China. Policy stimulus and momentum in the AI sector are beginning to support a rebound in activity. On the fixed income side, global bond markets are reflecting expectations of stronger growth and inflation..
Locally, we expect the South African rand to remain under pressure, largely due to rising public debt and persistent political uncertainty. Nonetheless, a weakening U.S. dollar offers some support to the rand, and we foresee continued dollar softness in the months ahead as reduced US trade activity dampens demand for the currency.
Despite their attractive valuations, South African equities remain vulnerable to shifts in global sentiment. A selective approach is crucial, focusing on companies with the potential to grow earnings in a low-growth domestic environment.
Our allocation to South African government bonds remains limited. Instead, we favour exposure to high-quality, secured credit instruments. We are also maintaining a moderate cash position, providing us with the flexibility to capitalize on potential opportunities arising from future market dislocations.
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