BASTIAN TEICHGREEBER: Caution the watchword for investors in 2025

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 the US economy is growing above trend, driven by robust consumer spending, declining political uncertainty as the election cycle stabilises, and a resilient labour market. Those factors collectively point to potential upside surprises in US GDP growth for 2025. Despite this acceleration in growth, inflation concerns remain muted.

Inflation in the US 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.

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 US Federal Reserve (Fed) is poised to approach monetary easing cautiously. While there is room for interest rates to gradually converge towards the natural rate (the so-called R-Star), it is essential to consider that R-Star itself may have risen. Enhanced productivity since the Covid-19 pandemic  could allow the US 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 Fed’s usual policy focus, which remains centred on demand-driven inflationary trends.

RISK ASSETS: STRETCHED VALUATIONS

Despite the optimistic macroeconomic outlook, valuations in risk assets remain a significant concern. In both developed and emerging economies equity markets are grappling with the dual challenges of high valuations and tighter financial conditions. US 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 stretched valuations. That has prompted investors to reassess their risk exposures, leading us to adopt a moderately negative stance on US and EU equities.

Emerging market equities present a more nuanced picture. While certain regions benefit from favourable commodity prices and reform agendas, others face 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, SA 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. However, sentiment has shifted positively for SA bonds, and term premium remains available. This supports a neutral stance, with the potential for attractive returns over the months to come.

On the currency front, we are strongly positive on the rand. Several factors underpin this view: the currency remains undervalued, presenting an attractive opportunity for long-term investors. The global economy’s favourable stance towards carry trades supports high-yielding currencies such as the rand. 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

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.

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 that 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. For instance, SA income strategies offer yields exceeding 10% in an environment of sub-3% inflation. Similarly, US income strategies provide competitive yields of about 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 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.

• Teichgreeber is CIO at Prescient Investment Management.