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JEREMY MAGGS: The global economy seems to have limped into 2025, grappling with renewed trade conflicts, ongoing inflation, and South Africa’s disappointing growth rate of merely 0.6%. Currently, uncertainty appears to be our only constant. Furthermore, the anticipated national budget has been postponed to May 21 amid the fragile government of national unity [GNU]. Investors find themselves with numerous questions and little clarity.

Let’s delve into these complexities. Joining me is Mark Phillips, head of portfolio management and analytics at PPS Investments. Mark, given last year’s growth rate of 0.6%, do you think South Africa remains an attractive option for long-term investors, or are the foundational issues too overwhelming?

MARK PHILLIPS: Thank you, Jeremy. While South Africa isn’t experiencing a boom, it’s managing to maintain stability. The Reserve Bank is currently adopting a cautious stance. The OECD has even raised South Africa’s growth forecast for 2025 to 1.6%, a notable improvement considering last year’s performance.

This is largely due to strong commodity exports and a relatively stable inflation landscape. The SARB took action in January and opted to pause in March, reflecting prudent caution.

As you pointed out, there’s a lot of political noise surrounding the budget, VAT [value-added tax], the necessity for structural reforms, and the uncertain alignment within the GNU.

JEREMY MAGGS: Many are echoing your sentiment that trade fragmentation and tariffs present serious global risks. For South African investors, do you think they are underestimating the potential impact of a Trump 2.0 scenario on an emerging market like ours?

MARK PHILLIPS: The tariff shock in April might be one of the most significant events we’ve seen in a generation. The current 90-day pause might only be a temporary reprieve. Some may argue that this tariff shock is reminiscent of events from the 1930s, which could reshape global trade dynamics and investor confidence.

South Africa is still a relatively liquid emerging market [EM], so any negative sentiment toward EMs can resonate here. However, there are opportunities; if there’s a movement away from the U.S. dollar in pursuit of yield, we could be well-positioned. Nevertheless, substantial political and structural reforms are vital, and whether we actively pursue those remains uncertain.

JEREMY MAGGS: Where do you see opportunities, Mark?

MARK PHILLIPS: Given our current bond yields, which are quite appealing—inflation plus 5%—the outlook is positive. Both the SARB and the IMF have indicated broader disinflation, which makes higher real yields advantageous in a portfolio context.

Nonetheless, there are inherent risks. When reviewing asset allocation strategies, we’re underweight in certain asset classes due to existing fiscal risks and uncertainties. Still, a strong real yield can support a portfolio over time.

JEREMY MAGGS: Mark, let’s shift our focus to the individual investor. Considering what you’ve detailed, how should they approach risk and adjust their mindset?

MARK PHILLIPS: Reflecting on 2024 can provide context, even though history doesn’t repeat itself exactly. At the start of this year, the sentiment was one of recovery. For 2025, it’s vital to strike a balance: will the U.S. and China de-escalate? If not, that could be concerning. Conversely, if Trump cuts taxes, we could witness a positive surprise.

During challenging times, the instinct might be to react. However, we advise maintaining discipline and caution, ensuring enough exposure to agile managers adept at navigating upcoming challenges.

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The market is presently forecasting a technical recession—nothing beyond that. The general belief is that while Trump may have hesitated, he could pivot again, leading to a challenging environment where pricing in risk becomes complicated post-tariff announcement.

JEREMY MAGGS: That indeed presents a challenge, doesn’t it? The unpredictability from Donald Trump significantly complicates risk assessment.

MARK PHILLIPS: Exactly. Caution is essential. Our strategy has centered around resilience while maintaining flexible thinking. We’ve adopted a moderate risk-on stance concerning South African equities and a longer duration in global bonds to align with the prevailing shift toward safety.

The first quarter has shown that market movements are increasingly dictated by narratives. Recent announcements have ushered in considerable uncertainty that we must adapt to.

As we near July 4, the temporary respite from the 90-day pause might not endure. It’s crucial to confront the new reality of geopolitical fragmentation and its unpredictable policy impacts on fiscal landscapes and trade.

JEREMY MAGGS: What risks does PPS currently foresee for portfolio erosion? Is it within equities, as you’ve mentioned, or perhaps in bonds or even cash?

MARK PHILLIPS: When the economic tide recedes in times of crisis, safe havens can shrink. However, our positioning reflects diverse considerations, including valuation and ongoing momentum shifts.

We still favor South African equity due to sound valuation fundamentals. As seen in Q1, there is safety in real assets, and our commodity and gold producers have supported the equity market, indicating that opportunities are present.

While we maintain caution regarding nominal bonds, the outlook for real yields is promising. Cash remains essential, both domestically and internationally, due to uncertainty and as a reserve for potential market pullbacks.

Global equities seem richly valued, prompting us to adopt a neutral stance; sometimes, missing out on a bull market can impede long-term portfolio performance. We aim to maintain this balance, ensuring we recognize the right time to diversify from the U.S. toward the euro or other emerging market currencies.

JEREMY MAGGS: Thank you, Mark Phillips, for that enlightening overview. You are the head of portfolio management and analytics at PPS Investments.

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