As we enter 2025, a strong dollar and a looming trade war are headwinds for emerging markets. However, interest rates are declining and there is evidence of some positive structural changes in countries such as Argentina and SA.
US president-elect Donald Trump’s return to the White House brings back his tariff wars, deportation of undocumented immigrants — which should reduce labour supply — and supposed US austerity via the new department of government efficiency.
These are supporting the dollar, which is expected to remain strong until a trade deal is done. Dollar strength puts pressure on emerging-market currencies such as the rand, commodities such as platinum, and rest-of-world assets in general.
On the tariff front, Europe and China are far better prepared for tariff retaliation this time around. The Washington Post reported recently that the Trump team is preparing trade tariffs against all countries, but only on a limited range of critical goods.
In addition, Trump stated in December that “Beijing and Washington could work together to solve all the problems of the world”, and invited president Xi Jinping to his inauguration. While it is unclear if Xi will indeed attend, it is plausible that a broader trade deal will be done.
Trump’s nomination for treasury secretary, Scott Bessent, has suggested a new Bretton Woods reordering is on the cards. He believes companies will only relocate to the US if it raises tariffs, deregulates and, importantly, weakens the dollar. The latter would be a significant positive catalyst for emerging markets, and commodities.
Meanwhile, France is in a debt crisis and Germany in a political crisis. Neither portends well for the euro. Europe could see some light at the end of the tunnel should Trump manage to end the Russia-Ukraine war, or at least achieve a ceasefire.
If the Bank of Japan eventually hikes rates this year, it might trigger repatriation of offshore assets held by Japanese investors. This could be especially problematic for global bond markets, specifically heavily owned French bonds.
China is likely to announce fiscal consumer stimulus in March at the Two Sessions, which it hopes will grow consumption. While the politburo has announced necessary structural reforms, consumer stimulus efforts have been ham-fisted. Xi did promise to push consumption this year, and should he succeed it could unleash some of the $20-trillion in cash held in bank accounts by Chinese households.
Meanwhile, artificial intelligence (AI) progress is accelerating, with surprising progress by China despite a lack of Nvidia GPU chips. If progress continues at its current pace, stock performance will shift from AI providers to companies applying AI.
Should AI agents grow in scale, we might see a sharp shift lower in new US job openings, which could be problematic in the US, an economy highly reliant on consumption, which contributes 68% of GDP. The US treasury market is another focus with significant bonds maturities, and another extraordinary budget deficit that will need to be financed.
As I write, Tencent, Naspers and Prosus are all down 7%-10% after the US defence department designated Tencent a Chinese military company operating in the US. Tencent will appoint lawyers to show that this inclusion is a mistake and try to get the decision reversed. Other Chinese companies that have previously been similarly designated have been successful in reversing the decision, but the process can take six months.
Domestically, the government of national unity is holding, despite a significant test in December around the Basic Education Laws Amendment Act. The February budget is expected to be reasonable, while Eskom and Transnet are making steady progress to boost growth in 2025, after restricting growth in 2022 and 2023.
SA is at present less correlated with global markets due to the positive effects of Operation Vulindlela. We are operating off a low economic base, with the benefit of greater consumer and business optimism, less load-shedding and falling interest rates. To sustain this optimism, the government needs to create an environment for business to grow employment. Success lies in working together.
January brings Christmas trading updates from our retailers, and these announcements often drive outsize share price movements. Last year the retailers performed well, with the retail index up more than 40%. However, much of this performance was driven by a rerating, rather than earnings growth. For current higher valuations to be sustained, we need an acceleration in earnings.
January has already yielded a few surprises, and 2025 is likely to be anything but dull.
• Van Rensburg is a consulting strategist to All Weather Capital
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.