As we approach 2025, global markets present a dynamic mix of opportunities and risks. Geopolitical tensions, shifting economic policies, and evolving consumer dynamics are reshaping the investment terrain.

The ability to cut through short-term noise and focus on long-term fundamentals is more important than ever. By adopting a systematic and evidence-based approach, investors can navigate these complexities and position themselves to seize opportunities across asset classes.

Trump-era Tariffs

Recent data indicates that the U.S. economy is growing above trend, driven by robust consumer spending, declining political uncertainty as the election cycle stabilises, and a resilient labor market. These factors collectively point to potential upside surprises in U.S. GDP growth for 2025.

Despite this acceleration in growth, inflation concerns remain muted. Inflation in the U.S. is largely driven by the shelter component of the Consumer Price Index (CPI), which suggests a singular leg of support. This narrow inflation driver could result in positive inflation surprises, particularly as broader price pressures remain contained. However, potential risks to this outlook include the lingering effects of Trump-era tariffs. While tariffs can create short-term price shocks, they are unlikely to trigger sustained inflationary pressures. From a macroeconomic perspective, tariffs tend to exert a one-off impact on price levels, rather than influencing long-term inflation dynamics.

Given the above backdrop, the Federal Reserve is poised to approach monetary easing cautiously. While there is room for interest rates to gradually converge toward the natural rate (R-Star), it is essential to consider that R-Star itself may have risen. Enhanced productivity post-pandemic could allow the U.S. economy to sustain higher rates than pre-COVID levels. Nonetheless, we do not anticipate tariffs to be a core driver of higher rates. As supply-side shocks, they fall outside the Federal Reserve’s usual policy focus, which remains centered on demand-driven inflationary trends.

Risk Assets: Cautious Stance Amid Stretched Valuations

Despite the optimistic macroeconomic outlook, valuations in risk assets remain a significant concern. In both developed and emerging markets, equity markets are grappling with the dual challenges of high valuations and tighter financial conditions. U.S. and European equities have rallied significantly, driven largely by the technology and growth sectors. While these gains reflect strong corporate earnings and economic resilience, they have also pushed valuations to stretched levels. This has prompted investors to reassess their risk exposures, leading us to adopt a moderately negative stance on U.S. and EU equities.

Emerging market equities present a more nuanced picture. While certain regions benefit from favorable commodity prices and reform agendas, others face headwinds such as geopolitical tensions and structural challenges. China, for example, contends with weak demographics, a struggling property sector, and trade policies that could face renewed pressure under a Trump presidency. As such, we remain neutral on emerging market equities overall, emphasising selective exposure based on regional fundamentals.

In contrast, South African equities stand out as a relatively attractive opportunity. Moderate valuations and improving investor sentiment support a positive outlook for this asset class, particularly when compared to developed markets.

On the fixed income front, we take a nuanced approach. We maintain a moderately negative view on US Bonds, mostly due to the inverted yield curve, lack of term premium, and limited demand for safe-haven assets in a positive macro environment. For South African Bonds, however, sentiment in South Africa has shifted positively, and term premium remains available. This supports a neutral stance, with potential for attractive returns over the months to come.

On the currency front, we are strongly positive on the South African rand. Several factors underpin this view:  Firstly, the rand remains undervalued, presenting an attractive opportunity for long-term investors. Secondly, the global economy’s favorable stance toward carry trades supports high-yielding currencies like the rand. Thirdly, improving Sentiment: Positive shifts in local and global sentiment further bolster the rand’s prospects.

To navigate currency risks, we advocate for systematic hedging strategies. Separating currency exposure from asset class performance enhances the overall risk-return profile of an investment portfolio.

Geopolitical Risks: Key Tailwinds to Monitor

While the macroeconomic environment is broadly supportive, geopolitical risks remain a significant wild card. The ongoing conflicts in Ukraine and Israel, with no signs of de-escalation, pose potential headwinds to global markets. These risks underscore the importance of maintaining diversified portfolios and systematic investment approaches.

The Systematic Edge: Evidence-Based Investing in 2025

In times of market uncertainty, human biases often lead to bad decisions. News headlines capture attention, but they rarely capture the full economic picture. A systematic, data-driven investment approach cuts through this noise, enabling objective evaluation of asset classes, effective risk management, and the identification of high-conviction opportunities.

For 2025, balanced portfolios remain essential to navigating the dual challenges of stretched valuations and geopolitical uncertainties. South African income strategies, for instance, offer yields exceeding 10% in an environment of sub-3% inflation.

Similarly, U.S. income strategies provide competitive yields around 6%, even in a low-inflation context. These opportunities highlight the importance of diversification and prudent asset allocation.

Systematic investing not only helps investors remain grounded during market volatility but also positions portfolios for long-term success. By prioritising data and eliminating biases, investors can identify the economic signals that truly matter. This disciplined approach remains critical for navigating the complexities of the coming year and ensuring robust financial outcomes in both favourable and challenging market conditions.

By Bastian Teichgreeber, CIO Prescient Investment Management