Looking back at 2024 and what lies ahead for 2025

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CIARAN RYAN: We’re nearly a month into 2025 and there’s a sense of optimism that the global and South African economies are on the right track. There are notable improvements at Eskom and Transnet, and we recently celebrated 300 days without load shedding. Inflation figures for South Africa are dropping and that points to further interest rate cuts through the year.

The property market is recovering and the prospects for an earlier removal from the grey list are promising, so there’s a lot of blue sky ahead. To discuss that further we are joined now by Adriaan Pask, chief investment officer at PSG Wealth.

Hi Adriaan, a happy new year to you, and thanks again for your time. As usual at this time of year can we reflect briefly on what happened in 2024 and what you expect in 2025?

ADRIAAN PASK: Hi, Ciaran and hello to the listeners as well. It’s been an eventful period.

Looking back at interest rates, it’s clear that both locally and internationally, the key issue has been how policymakers have addressed inflation and how they plan to either sustain growth or, in South Africa’s case, boost growth figures moving forward.

The bond markets stood out for South African investors, with local bonds performing well, while US bonds remained relatively weak. However, US equities have done exceptionally well, even considering their high valuation levels at the start of last year.

South African equities, though trailing their US counterparts, have also performed decently given the political climate.

Another positive has been the property market, which emerged as the top-performing asset class last year, driven by lower interest rates and higher long-term bond yields. Consequently, property deals have become more favourable, and capital values have appreciated.

All things considered, a well-diversified portfolio would have performed strongly.

Investors often benchmark their portfolios against the S&P 500, which is a high expectation to meet. I believe a shift is imminent in that regard, as the market has been robust for an extended period, with valuations continuing to rise.

On the flip side, while South African asset classes have been re-rated and prices have increased, there’s still significant potential for South African assets to perform well.

However, it’s not limited to South Africa; across the board, many asset classes look promising.

Cash rates are generally higher than long-term averages, and yields on corporate and government bonds, as well as listed property, are above historical norms. Even equity yields in South Africa and abroad are currently favourable compared to their historical averages, with the notable exception of US assets.

There are certainly concerns, particularly regarding the concentration risk in the US stock market with the ‘Magnificent Seven’ and the rising valuations.

Additionally, the US debt ceiling and the potential for increased borrowing costs due to high interest rates are important issues, considering the size of the US economy and its role in global GDP. Despite the strength of the US market, this is my primary concern, given the global implications.

On a positive note, there are many opportunities across global markets, and although inflation fears have resurfaced in the US, interest rates are expected to decrease, albeit at a slower pace than anticipated six months ago.

In South Africa, the inflation outlook is favourable, with inflation now near the lower end of the target range at 3.6%. This gives the Monetary Policy Committee room to promote economic growth, especially as sentiment improves, not only in emerging markets but also within South Africa.

CIARAN RYAN: Let’s look at economic growth prospects. There’s a lot of positive news in what you’re saying. I mentioned at the beginning the turnaround at Eskom and Transnet; that’s very good for the South African economy. What’s your take on this?

ADRIAAN PASK: I think there are some positive developments. Things aren’t healthy by any stretch of the imagination just yet – but, that being said, we are in a much better position than we could have been, and things are moving in the right direction.

Eskom is far less of a worry than it was maybe 12 months ago. I think the typical man on the street wouldn’t have believed that we would see as many consecutive days without load shedding as we have.

At the same time Transnet seems to be a lot better managed. They have far clearer plans in terms of what they want to achieve and how they’re going to address their issues – and it looks like they’re making incremental progress on those matters.

So I think a big thing that has historically kept our valuation so low was the fact that these poor-sentiment factors kept weighing on investors’ minds.

It’s been challenging for foreign investors to enter the country when issues like rail and electricity infrastructure, as well as corruption, were as widespread as they were just a few years ago.

While some of these challenges still persist, what investors typically seek is tangible evidence that progress is being made in addressing them.

Once that progress is visible, the value unlocks, and I believe we’re starting to see that.

There’s always some legislation that raises concerns for investors, which is normal, but with the presence of a GNU [government of national unity] and a more balanced government in terms of decision-making, there seems to be greater rationality in the discussions. It’s one thing to have intent and focus on specific outcomes, but it’s equally important to consider the long-term consequences of decisions.

This focus on long-term impacts has become more prominent in the debate, which is very encouraging. As a result, investors are beginning to look at South Africa more favourably again.

We’ve started to see capital flows back into our markets, and it’s clear just how quickly these flows can affect the market, especially considering the currently depressed valuation levels.

CIARAN RYAN: Adriaan, let’s talk about the risks. You’ve mentioned a couple. Investors aren’t going to be interested in a country that can’t keep the lights on, and where you can’t get product to the port because of rail inefficiencies. What if things don’t pan out the way we expect?

ADRIAAN PASK: Well, it’s a tricky one, because in a certain way I think if growth slows it’s typically seen as a bad thing. Especially if US growth slows that would be seen as a bad thing.

For us, it would actually be a positive from a portfolio perspective because we are underweight there, and that would mean to competitors that we are doing relatively well if that’s the scenario. Obviously, growth that slows in itself is a bad thing, but it would be good for our portfolio.

From a positioning perspective, our risk lies in the possibility of robust growth in the US moving forward. We discussed last year why we think that’s unlikely, given the signs of strain we’re beginning to see in the fiscal system.

Additionally, there are clear pressures emerging from both corporates and consumers, which suggests that growth may not be as strong as some expect. For a long time, higher interest rates didn’t significantly affect corporates, consumers, or the government, but we’re now definitely seeing the impact. Bankruptcy numbers, which we closely track, have been steadily increasing.

When it comes to US debt, the cost of servicing it is exceptionally high, and a bigger concern is that a substantial portion of this debt, issued when interest rates were very low five years ago, will need to be refinanced at much higher current rates. This trend is likely to continue unless interest rates are reduced quickly. However, with inflation concerns resurfacing, it will be interesting to see how the US handles the interest rate conversation. I believe Trump will push for lower rates, which aligns with his approach during his previous term.

I don’t think the authorities and policymakers really have the luxury to aggressively cut. So I would expect some tension between the presidency and the Fed over the coming months – which is also going to be interesting.

Other risks include China, which has the potential to surprise positively, especially given its current valuations.

However, it could just as easily experience further declines. There are significant fragilities within their system, particularly in the real estate market, which is a crucial driver in that part of the world. These ongoing struggles present a major risk, making China’s outlook uncertain.

In Europe, I think things will gradually improve, and there are some more affordable, higher-quality investment opportunities emerging. However, the situation feels quite similar to where South Africa was a few years ago, with investors focusing less on valuation and more on the perceived risks. There’s a cautionary approach, with concerns about stability often outweighing the attractiveness of lower valuations.

From a growth perspective, it’s a mixed picture, and South Africa’s situation is not much different. There were some very low base effects in the system, and those effects are still lingering. For instance, the instability in electricity supply and the constraints at Transnet have had a significant impact on our growth figures. However, both of these areas are gradually improving, which is helping the economy recover from that low base.

There’s definitely a chance we could surprise to the upside, especially if inflation continues to decrease. Remember, our GDP numbers are reported net of inflation, so if we see nominal growth ticking up while inflation falls, the results could be positive. That said, many of the plans are still just on paper, and we need to see tangible evidence that these plans will be implemented. It’s the successful execution of these plans that will drive the next phase of more sustained growth.

We’re still in the recovery phase, and it’s a fragile one. There are strong arguments for why the recovery could be sustained, but there are also valid reasons why it remains a risky bet to be overly confident in that space.

CIARAN RYAN: Finally, Adriaan, how do you position your portfolio given all of this and the potential risk, but also the upside both overseas and locally?

ADRIAAN PASK: I think for our portfolio, we remain concerned about the dollar. I think the dollar is not reflecting the challenges that they face fiscally. And I think that’s something that markets will have to grapple with in the coming months.

That being said, I think it’ll pay to be positive in 2025. As I say, many of the asset losses are yielding currently well above their long-term norms. And I think the trap for investors would probably be a fear of a US recession and a sell-off in the S&P, which will be negative for the global environment – both economically and from a market’s perspective.

But I think it’s important to keep in mind that, if you’ve got a quality asset, you stay invested in it. And there is a sell off that’s artificially driven by what’s happening in global markets – just sentiment that’s turning; that’s actually a positive thing because it provides you with the opportunity to buy that quality asset and top up at even lower levels.

So, I think even if we have flattish to positive markets, that will be obviously good. If we have negative markets, it’ll set us up for better long-term results. The key thing here is that we generally don’t sit in a market where asset classes are expensive. So, I think it will pay to be positive over the long term and the old cliché of diversifying – I think that’s really important. You can hear there are some fairly important things where the outcomes are quite uncertain, and they could pivot into the extremes. So, either extremely negative or extremely positive if we think of the China example, or even in South Africa.

Diversification is important, but investors also need to adopt a tactical mindset. It’s crucial not to shy away from areas that may feel uncomfortable but appear attractive.

In fact, the potential for positive returns often lies in those areas. The key is not to excessively shield yourself by diversifying too much or being underweight in assets that offer long-term value. It’s a delicate balance. While diversification is beneficial, you don’t want to end up with lazy assets in your portfolio. The goal should be to position yourself for long-term outperformance, ensuring that your investments are actively contributing to growth rather than just providing safety.

CIARAN RYAN: We’re going to leave it there. Thanks very much Adriaan. That was Adriaan Pask, chief investment officer at PSG Wealth.

Brought to you by PSG Wealth.

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