From factsheet to reality: Bridging the investment performance gap
In investments, it is very seldom that the portfolio manager and the investor experience the same return figures. We’re going to explore two ways to measure performance and unpack where the portfolio manager’s responsibility starts and ends.
Spoiler: investor composure is only part of the story.
Two windows into the industry
Fund performance can be measured in two main ways, and each tells a different story. The time-weighted return (TWR) is the figure you see on a fund’s factsheet; it measures how the investment itself performed over time, ignoring any money flowing in or out. In essence, TWR answers, ”How did the fund do, if we assume a fixed investment throughout?”. The money-weighted return (MWR), by contrast, accounts for the timing and size of contributions or withdrawals, reflecting how an investor in the fund performed. This is aligned to the return on the investor’s statement. Clearly these are not the same.
So why does the industry have two measures of performance for the same fund?
Traditionally you’ll be told to think of TWR as the fund manager’s scorecard as it isolates their skill by removing the impact of investor cash flows (I’m going to challenge this assertion). MWR, on the other hand, shows the investor’s experience; it is the result of not only the fund’s performance, but also the investors’ money-weight exposure to the fund.
In a perfectly steady world with no cash flows, TWR and MWR would be identical. But in the real world, they often diverge whenever investors pour money in or withdraw money out at various times.
The “Behaviour Gap”: When investors earn less than the fund
Investors often find that their personal returns (MWR) are lower than the fund’s published returns (TWR). This shortfall is commonly called the “behaviour gap,” defined as “the difference in return between what the factsheet shows and what our investment actions delivered”. Why does this gap happen? Well, a foundational principle of investment management is a concept of “the rational investor”, which we don’t believe exists, in large part because real people don’t invest and forget, we get excited and fearful.
Studies by Morningstar (their annual ‘Mind the Gap’ study1) have found a persistent pattern: investors tend to buy high and sell low, chasing performance on the way up and panic-selling on the way down. Over time, this behaviour can cause investors to consistently underperform the very funds they invest in. It may only be a percentage point or so each year, but that small annual drag adds up; over 30 years it could mean a retirement nest egg that is 40% smaller.
There are a few serial offenders that cause investors to behave this way, but volatile funds such as thematic investments lead the way. The exciting storytelling of clean energy, or artificial intelligence, are often the highest-flying funds on paper (TWR) but can deliver the poorest investor experience (MWR) in practice. When hype unwinds: A real-world example Let’s look at a recent example of the behaviour gap in action. The iShares Global Clean Energy ETF became a star performer in 2020 with a 140% return that year. Excited by this success and the headlines surrounding it, investors piled into the fund, doubling the fund size by January 2021. But the hype didn’t last, and the theme rolled over. Assessing the fund over a five-year period reveals a handsome factsheet return was +17% per annum (TWR), however, the average investor in that ETF actually lost about 3% per year (MWR).
That’s a staggering ~20% performance gap, and the flag that is common across most experiences such as this one is a compelling theme or narrative that can entice investors at exactly the wrong time. The hype fades and investor allocations, and often returns, unwind.
Why do we not learn our lesson? Brandon Zietsman explains how our relationship with an uncertain future often drives us to seek comfort in stories and trends. Author Morgan Housel states that we “crave certainty and are attracted to complexity. Good stories persuade us far more than facts”.
Who bears responsibility for the gap?
Given this gap, a crucial question arises: who is accountable for it? Traditional thinking might say the investor is responsible for their timing decisions. However, an investor-centric solution (like that of PortfolioMetrix) suggests shared responsibility. If a fund’s design or the way it’s promoted encourages counterproductive behaviour, the manager should arguably bear some responsibility for the outcome. For example, a fund that aggressively touts its exceptional past returns might inadvertently lead people to buy in at peaks. In such cases, the manager’s scorecard shouldn’t just consider TWR, but also how investors actually fared via MWR (a customer survey so to speak). Did the majority of investors in the fund capture those high returns, or did they suffer a large behaviour gap? A truly skilled manager (or strategy) would ideally produce good TWR and help investors stay the course to realise those returns. The factsheet and the investor’s statement would be close cousins rather than distant strangers.
The PortfolioMetrix approach to bridging the gap
Historically the burden of reducing the behaviour gap has been passed to the adviser like a hot potato, or simply blaming bad investor composure. We believe the answer lies in those traditional practices, and in better portfolio design. On the portfolio side, it means constructing diversified, robust portfolios that investors can live with through thick and thin. Avoiding single-factor risks, and identifying the investor’s Financial Personality, mapping them across into their composure zone, and ensuring they invest in a solution (not a product) that best suits them and their financial goals. These concepts are in our DNA at PortfolioMetrix. We aim to engender trust by building strategies that don’t rely on chasing the latest theme or taking extreme bets. A well-diversified, risk-managed portfolio may not shoot the lights out in any one year, but it also won’t inspire the kind of boom-bust behaviour that leads to large behaviour gaps.
We aim to compound consistency into long-term outperformance, an investment strategy that complements the adviser’s value-add, builds trust, and helps us all sleep well at night.[/vc_column_text][us_separator][vc_column_text]
SARB holds rates at 7% to assess impact of earlier cuts
On 18 September, the Reserve Bank left its key lending rate unchanged at 7% in a closely watched decision, holding off on further monetary easing while it assesses the impact of previous rate cuts. The statement emphasized vigilance, with inflation now near the lower end of the 3–6% target range, and reiterated the Bank’s preference for firmly anchoring inflation expectations.
South Africa’s utility Eskom reported its first full-year profit in eight years on Tuesday, helped by government debt relief, higher tariffs and a sharp reduction in power cuts. The frequency of its outages has reduced dramatically since early last year due to a sudden turnaround in the performance of its coal-fired power station fleet. There were just 13 days of power cuts in its latest financial year, compared to a record 329 days a year earlier. Eskom made a profit after tax of R16bn in the year to the end of March 2025, compared to a R55bn loss a year earlier.
SA Business conditions improve, but caution remains
South Africa’s private sector showed mild improvement in September, with the PMI rising to 50.2. PMI readings above 50 signal growth, while those below indicate contraction. Output and new orders increased, supported by easing cost pressures and a stronger rand. However, business expectations fell to their lowest since mid-2021, reflecting ongoing political and economic uncertainty.
The US and China agreed to extend their tariff truce for 90 days, easing immediate trade tensions and stabilising global supply chain sentiment. Asian markets responded positively, especially in export-driven sectors. While structural risks remain, the pause offers markets a degree of short-term clarity and a chance to reassess the impact on, arguably, the world’s two biggest superpowers. It remains to be seen as to whether this just kicks the can down the road for another 3 months or whether we see a more permanent agreement being reached in the interim.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2354″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
US Monetary Policy Loosening
The Federal Reserve (Fed) cut rates by 0.25% in September, citing labour market softness despite inflation staying above target. Markets initially hesitated but rallied after the Fed signalled a cautious, supportive stance. Despite signs pointing to a broadly supportive environment for economic growth, market participants still expect a couple more rate cuts by the end of the year.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2355″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
Resignation of Japan’s Prime Minister
Japan’s Prime Minister Shigeru Ishiba resigned after electoral losses, with Sanae Takaichi expected to step-in. Despite the ultra-conservative stance of the newcomer, the transition should be fairly smooth as she will need to unite with other parties in the coalition. As a result markets remained stable, supported by expectations of continued stimulus. But this is an area to watch as Japan has begun setting itself back on a good path of economic stability.
In investing, uncertainty is often cast as the villain. It unsettles markets, shakes confidence, and tempts us to retreat to the safety of cash. But this view misses a fundamental truth: uncertainty is not the enemy—it is the very condition that makes reward possible.
The relationship between risk and return is foundational to investment theory. Assets with more predictable future cash flows, like government bonds, tend to offer lower returns. Their stability comes at the cost of limited upside. Equities, on the other hand, are exposed to a wide range of unstable factors—economic shifts, competitive pressures, and changing consumer behaviour. This uncertainty translates into volatility, which is uncomfortable, but also necessary. Without it, there would be no incentive to invest beyond the risk-free rate.
Despite this, our natural aversion to uncertainty often leads us to make decisions that work against our long-term interests. We crave stability, and when markets fluctuate, we react emotionally—selling in downturns, chasing performance in rallies, or avoiding risk altogether. But avoiding risk entirely means accepting returns that may fall short of what we need to achieve our financial goals.
The answer is not to eliminate risk, but to take the right amount of it. Most investors tend to be cautious, sometimes to their own detriment, while a smaller group leans too far the other way, seeking risk for its own sake in pursuit of outsized returns. But this approach rarely pays off either. The higher the risk, the more dramatic the swings, and the harder it becomes to stay invested through market turbulence. Bigger drops demand stronger recoveries, and confidence can quickly erode. The most effective way to invest is not by aiming for the highest possible return, but by taking just enough risk to reach your destination.
What’s more concerning is when this imbalance in risk isn’t driven by the investor, but by the fund manager. There are cases where portfolios are constructed with far more risk than is necessary to meet the investor’s intended outcomes. This isn’t just inefficient, it reflects a deeper misalignment between the investment solution and the investor’s needs. The real value lies in partnering with an investment manager who understands how much risk is enough, and who works alongside the adviser to shape investment objectives and manage portfolios accordingly. When this partnership is strong, the strategy becomes purposeful; not a pursuit of performance for its own sake, but a considered approach that matches the investor’s journey with the right amount of risk.
Uncertainty, then, should not be feared, it should be understood. It is the reason markets exist, the reason prices move, and the reason opportunities arise. Without it, there would be no chance to earn more than the return on cash. But it must be approached with care. Risk is not something to be chased, nor something to be avoided entirely. It is something to be measured, managed, and matched to the investor’s needs.
By reframing uncertainty as a source of possibility rather than a threat, we can help investors build more resilient portfolios, make better decisions, and stay the course through market cycles. Because in investing, as in life, rewards never come without a cost. That cost is paid in the currency of uncertainty. The key is not to avoid it, nor to overspend it, but to use it wisely, and allowing time to do the heavy lifting. When wielded with care and patience, uncertainty becomes the very force that delivers meaningful rewards.
SARB starts easing, with lower inflation anchor in sight
The Reserve Bank cut the repo rate by 25 basis points to 7.00%, effective 1 August, and signalled it now prefers to anchor inflation at the bottom of the 3–6% band (around 3%). The unanimous move followed a May cut and came against a backdrop of a firmer rand into late August and slightly easier bond yields (the 2035 benchmark eased to ~9.58% near month-end).
Inflation ticks up but stays within target, keeping the door open to gradual cuts
July CPI rose to 3.5% y/y (0.9% m/m), driven mainly by food & non-alcoholic beverages (+5.7%) and housing & utilities (+4.3%), all still comfortably inside the SARB’s 3–6% target, while producer inflation also edged up to 1.5% y/y. In plain English: prices are rising a touch faster, but not fast enough to derail the easing cycle—so long as fuel and food costs don’t surprise higher. That leaves room for measured further rate cuts as global conditions allow. (CPI = consumer price index; PPI = producer price index.)
Freight rail opens to private operators— an important step for exports and growth
Government approved 11 private train operators for access to 41 routes on Transnet’s network, a long-awaited reform aimed at easing rail bottlenecks that have hampered bulk exports (coal, iron ore, chrome, manganese and fuel). Authorities framed the move as additive capacity rather than a replacement for Transnet, with contracts ranging 1–10 years and a clear goal to lift freight moved by rail towards 250 million tonnes by 2029. Practically, it will take time—permits, contracting and ramp-up—but if executed well this should improve miners’ throughput, reduce logistics costs and, over
time, support the trade balance and the rand.
Markets lurched lower at the start of August after a weak US jobs report (just 73k payrolls and hefty downward revisions to prior months) saw the S&P 500 drop about 1.6% in a day and short-dated Treasury yields tumble, with the 2-year registering its sharpest one-day fall in months; sentiment then recovered after Fed Chair Powell used Jackson Hole to signal that rate cuts were likely “as the balance of risks” shifts, helping the S&P 500 finish August up roughly 2% with fresh record highs.
Political pressure on the Fed—most notably President Trump’s move to fire Governor Lisa Cook—kept central-bank independence in focus and raised longer-term inflation worries, while Powell’s dovish tilt boosted rate-cut bets; the result was a weaker US dollar (the dollar index fell ~2% in August) and gold pushing to new records above $3,500/oz as investors sought safety.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2355″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
France: confidence vote jars bonds
France re-entered the market spotlight after Prime Minister Bayrou set a 8 September confidence vote tied to budget cuts, prompting a sell-off in OATs (French government bonds) as the OAT–Bund spread (the gap to German yields) widened to around 80bps and, at one point, French 10-year yields traded within single-digits of Italy’s—a rare convergence that underlined rising fiscal-political risk.
Global markets continued to build on their mid-year momentum in July, buoyed by easing inflationary concerns, resilient corporate earnings, and improved risk appetite across developed and emerging markets. US equity markets delivered another solid month, with the S&P 500 climbing 2.22% in USD and the Nasdaq 100 advancing 2.40%, supported by ongoing strength in technology and AI-linked counters. Year-to-date, these indices are up 8.34% and 10.82%, respectively. This bullish sentiment prevailed despite the Federal Reserve opting to hold rates steady at 4.5%, resisting mounting political pressure from the Trump administration to ease monetary policy in light of tepid service sector growth and softer private sector hiring.
Economic data out of the US remained mixed. Second-quarter GDP came in above expectations, but payroll growth slowed, with only 74,000 private sector jobs added in June. Inflation re-accelerated slightly, with the PCE deflator and CPI both ticking up to 2.6% and 2.7% year-on-year, respectively. However, forward-looking indicators such as consumer confidence and the Conference Board’s Expectations Index improved, suggesting a more optimistic outlook heading into the second half of the year.
In Europe, equity markets also registered gains, led by the FTSE 100, which returned 0.74% in USD terms for the month and 20.69% YTD. The ECB paused rate cuts in July, maintaining the policy rate at 2%, while negotiations over new transatlantic trade agreements continued to weigh on investor sentiment. Inflation across the Eurozone held steady at the 2% target, although services inflation remained sticky.
China was a standout in emerging markets once again. The Hang Seng Index gained 3.09% in July, bringing its YTD return to 25.19% in USD, driven by improving economic data and strong export growth to ASEAN countries. Chinese GDP expanded by 5.2% in the second quarter, outpacing expectations, while exports rose by 5.8% year-on-year in June. However, weakness in manufacturing PMI, which slipped to 49.3, highlighted the ongoing drag from elevated US tariffs. Japan’s Nikkei retreated by 1.73% in USD, despite improved business sentiment and a stronger services sector, as the Yen weakened and concerns about slowing exports re-emerged.
Commodities were mixed. Brent Crude surged 13% during the month on supply constraints and rising demand, while precious metals held firm as geopolitical risks underpinned safe-haven demand. Industrial metals, particularly copper, were volatile due to tariff concerns, but gold consolidated recent gains with ongoing Central Bank purchases.
The MSCI Emerging Markets Index rose 1.95% in USD for the month and is up 17.51% year-to-date, outperforming developed markets (MSCI World +1.29% for July, +10.88% YTD). The Dollar weakened modestly, adding to EM momentum.
South African Market Overview
On the local front, South African assets performed strongly in July, aided by positive global sentiment and a dovish shift from the South African Reserve Bank. The FTSE/JSE All Share Index rose by 2.27% in ZAR terms, with a robust 19.35% YTD gain. SA Listed Property delivered a return of 4.75% in July, while All Bonds returned 2.73%, both benefitting from lower inflation and rate expectations. The Rand was relatively stable, ending the month at R18.22/USD.
The SARB delivered a well-telegraphed but impactful 25bps rate cut, lowering the repo rate to 7.00% in a unanimous MPC decision. The Central Bank also signalled a shift in its inflation-targeting approach, indicating a preference to guide inflation toward the lower end of the 3–6% band, closer to 3%. This was interpreted by markets as a signal of future easing bias, particularly as headline CPI remained anchored at 3% and core inflation softened to 2.9%.
South Africa’s economic data was subdued but showed early signs of stabilisation. Manufacturing production posted a 0.5% year-on-year increase in May—the first positive figure in over six months—driven by metals and machinery. Mining output rose a modest 0.2%, with precious metals offering some support. However, ongoing US tariffs on SA exports, especially in automotive and agriculture, continued to cast a shadow over forward-looking growth indicators.
From a sectoral perspective, July saw significant outperformance from resource-heavy counters. Sasol led the pack with an 18.99% gain on the back of operational improvements, Transnet settlements, and further investment into renewable energy projects. Sibanye Stillwater also gained 18.94%, boosted by its petition to US trade authorities to curb Russian palladium dumping. Meanwhile, heavyweights like British American Tobacco and Northam Platinum added to the strength. Conversely, consumer-focused stocks such as Mondi (-14.76%), Anheuser-Busch InBev (-12.39%), and Richemont (-10.58%) struggled on weaker earnings and external pressures.
South African bonds rallied as yields compressed following the SARB’s rate decision and dovish guidance. The bond market also responded favourably to subdued inflation and slightly improved fiscal metrics.
A strong round of Q2 earnings, led by U.S. tech giants, combined with mixed but resilient macro data supported modest equity gains. The S&P 500 posted mid-single-digit returns, while bond markets saw yields tick higher on better-than-expected growth metrics, underscoring the market’s balancing act between growth optimism and rate-cut anticipation. The market, however, is punishing companies that disappoint on earnings more than usual, highlighting that there is hi…
Tariff deadlines and fresh U.S. trade actions, alongside heightened Middle East tensions, kept risk sentiment on edge. Although many of the announced tariffs are now “known risks” and largely priced in, any unexpected escalation still triggered bouts of volatility, particularly in commodity and export-sensitive sectors.
Investors spent July parsing every word from the Fed and other major central banks. With inflation remaining above target but signs of economic cooling emerging, the probability of a September Fed rate cut climbed sharply. This dynamic kept both short and long-term yields under pressure, as markets positioned for an eventual easing cycle while bracing for ongoing policy uncertainty. Despite the intra-month volatility, the US 10-year year started and ended the month at a rough…
In July 2025, the South African Reserve Bank (SARB) cut the repo rate by 25 basis points to 7%, marking a pivotal shift in its monetary stance. Governor Kganyago announced that the SARB would now target the lower end of the 3–6% inflation band, anchoring expectations closer to 3%. This dovish pivot reflects confidence in inflation containment and aims to stimulate domestic investment and consumption. The move also aligns South Africa with global trends of gradual policy easing, enhancing the appeal of local bonds and equities. With core inflation at a four-year low and breakeven rates declining, this policy shift is a strong stabilising force for capital markets.
Geopolitical developments in July posed significant risks to South Africa’s trade and investment outlook. The US imposed tariffs of up to 39% on South African exports, with further sanctions looming. Although President Ramaphosa engaged in direct negotiations to delay these measures, the threat remains substantial, potentially impacting up to 100,000 jobs. The heightened uncertainty surrounding trade relations, particularly with the US, introduces volatility into the capital market and could influence investor risk appetite and portfolio allocations.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2355″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
JSE All-Share
The JSE All Share Index crossed 100,000 points, driven by strong commodity prices, solid earnings, and global investor optimism. This milestone reflects renewed confidence in South African equities and may attract further inflows.
The active versus passive debate has long been a fixture in the investment world. Often framed in binary terms, it suggests that investors must choose between costly human intervention and cost-efficient automation. But the reality is more nuanced. And perhaps it’s time to ask a better question: what if the difference between active and passive is not so much about method as it is about mindset?
While passive investing plays a valuable role in portfolio construction, it’s rarely as neutral as it’s made out to be. Even the most rules-based, index-tracking investment involves a range of embedded choices. Recognising those choices helps us use passive tools more effectively – not dismiss them.
Passive in Name, Active in Nature
Passive investing is often described as hands-off and objective. In practice, it’s anything but. Every index is a human creation – designed with intention, shaped by assumptions, and revised over time.
Take the FTSE All-Share and the MSCI UK All Cap. Both are designed to represent the UK equity market, yet they differ significantly in their construction. For example, the FTSE All-Share and MSCI UK All Cap indices differ in their sector exposures, despite both aiming to represent the UK equity market. These differences arise from variations in index construction and stock inclusion criteria, leading to materially distinct allocations across areas such as financials, industrials, and consumer goods. As the chart illustrates, what seems like a minor structural choice can result in very different investment outcomes over time.
Source: FTSE All-Share Index and the MSCI UK All Cap Index as of April 30, 2025.
Even within the same index, implementation choices matter. One provider may replicate fully, another may sample. Some may engage in securities lending, others may not. Policies around rebalancing, cash handling, and execution quality vary widely. None of this is passive.
Then there’s the S&P 500, one of the most widely used indices in the world. It isn’t rules-based in the purest sense; it has a selection committee that decides which companies qualify for inclusion. These are decisions – made by people – that affect every investor tracking that index.
Understanding Market Concentration
One of the more frequently raised concerns about passive investing is rising market concentration. It’s true that many indices today are heavily weighted towards a small number of companies, particularly in the U.S. technology sector. This isn’t necessarily an error in the system. History suggests otherwise. Research shows that just 120 companies have accounted for over 60% of U.S. equity wealth creation between 1926 and 2022. Concentration, in other words, may be a feature of capital markets – not a flaw of index design.
Source: Vanguard calculations using data from Shareholder Wealth Enhancement, Bessembinder (2023). Data as of 2022. Calculations based on total net wealth creation of individual U.S. publicly traded stocks as a percentage of total U.S. net wealth creation from all publicly traded U.S. stocks.
However, this reality must be understood and managed. Owning a market-cap weighted index fund means owning more of what’s already done well. That brings momentum and sector exposure into the picture, whether intended or not. For investors, the key is to understand these exposures and how they interact with the rest of their portfolio.
Source: LSEG Datastream, MSCI and Schroders Strategic Research Unit. Data as at 31 May 2025.
Every Passive Allocation Is Still a Choice
Investing passively may appear to be a straightforward route, but in reality, it involves a number of intentional decisions. Choosing one index over another is not a neutral act; it determines regional exposure, sector tilt, and the kinds of companies you hold. The selection of a fund provider matters too – from how they track the index, to their handling of costs, rebalancing, and operational policies.
Even the overarching decision to prefer passive over active reflects an investment belief: that markets are broadly efficient, and that cost-effective exposure is preferable to the potential of active outperformance. These choices deserve just as much thought as any active investment decision.
Where Active Still Adds Value
None of this is an argument to abandon passive investing. Far from it. Used well, passive strategies are efficient and scalable. But they should not be used blindly.
Active strategies still have a powerful role to play – particularly in areas where inefficiencies persist, such as smaller companies, emerging markets and complex credit markets. Good active managers take intentional, well-researched risks. They diversify sources of return and focus on repeatable processes rather than thematic hunches.
Source: SPIVA around the World 2025 and SPIVA Fixed Income Around the World 2025.
This kind of active investing doesn’t seek to time the market, but rather to apply judgement where market structure allows. Done well, it brings resilience, diversification and, over time, a more consistent client journey.
Blending for Better Outcomes
Passive exposures can deliver reliable, low-cost access to broad market returns. Active exposures, can introduce diversification and enhance return potential where market inefficiencies are present.
Crucially, the balance between active and passive should not be driven by a fixed formula. It is not linear. Instead, it depends on understanding where the inefficiency premia reside within a portfolio, and applying the appropriate approach accordingly. In well-researched, efficient markets, passive may be most suitable. In less efficient corners of the market, a skilled active approach may add meaningful value.
This bottom-up view allows you to design portfolios that are not merely cost-conscious but outcome-focused — built intentionally to balance systematic exposure with targeted opportunity.
Source: PortfolioMetrix, for Illustrative Purposes Only.
Final Thought: The Danger of Labels
The real risk in portfolio design isn’t just being wrong. It’s being unaware. The term “passive” can give a false sense of safety, leading investors to overlook the hidden exposures they carry.
There may be no such thing as purely passive investing. But that’s not a weakness. It’s an opportunity to look deeper, to think more critically, and to be more intentional with every allocation decision.
Because at the end of the day, success doesn’t come from choosing a camp. It comes from understanding what you own, why you own it, and how it fits within the bigger picture.[/vc_column_text][us_separator][vc_column_text]
SARB Governor Kganyago used the SARB’s annual report as an opportunity to double down on his support for a lower inflation target. Kganyago has, for a long time, advocated for a lower inflation target, and investors are increasingly positioning themselves for the realistic probability that this will happen. There is a high probability that the SARB will reduce its inflation target before the end of the year to synchronise SA with other emerging market peers.
President Ramaphosa’s dismissal of DA Deputy Minister Whitfield raised concerns about the stability of the GNU. Many feared the DA would withdraw from the GNU, triggering panic in the markets. The DA ultimately chose not to leave the coalition but seized the moment to highlight the hypocrisy of the president’s decision: taking no action against ministers implicated in corruption and wrongdoing, yet firing an opposition minister over what was widely regarded as a minor offence. The DA confirmed that it would withdraw from the president’s National Dialogue and not support the budget votes of any ministers implicated in misconduct
South Africa is close to exiting the FATF greylist, having completed all 22 action items in its Action Plan, including tougher investigations and prosecutions. An on-site assessment is expected before October 2025 to confirm the reforms are effective. National Treasury noted these improvements will help combat crime and corruption and should support the rand and bond markets in the coming months.
The Federal Reserve kept interest rates steady at 4.25%-4.50%, acknowledging that risks of higher inflation and unemployment have increased since March, partly due to Trump`s trade policies. Fed Chair Jerome Powell emphasized that their current policy is adaptable to changing economic conditions. Despite recent data anomalies from potential tariffs, the economy continues to expand moderately. This decision aligned with market expectations.
The US reignited trade tensions by doubling tariffs on steel and aluminium to 50%. The US also announced reciprocal tariffs ranging from 10% to 70% on countries without a trade agreement, which has heightened global uncertainty.
Although a trade agreement with China was announced on the 27th, its vague terms have done little to reassure investors. This policy uncertainty has increased market volatility, disrupted global supply chains, and placed pressure on corporate earnings.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2355″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
Monetary Policy Divergence
Developed market central banks continued to diverge in their policy responses. The European Central Bank cut rates by 0.25% to 2.00%, marking its eighth rate cut since June 2024, in response to slowing inflation. In contrast, the Fed held its base rate at 4.5% for the fourth consecutive meeting, with the FOMC stating that although “the unemployment rate remains low, and the labor market conditions remain solid,” uncertainty about the economic outlook was still elevated. The BOE also held rates steady due to ongoing economic uncertainty. This divergence in monetary policy has direct implications for both the FX and equity markets fueling volatility.
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]Investor Behaviour: The Greatest Threat to Portfolio Performance
Over the past decade, PortfolioMetrix has pioneered a paradigm shift away from the traditional “art and science” of investing to a more rigorous, risk-calibrated approach. While this delivers discipline and consistency, it cannot address one crucial factor: behaviour. Markets are not governed by immutable laws but by the impulses of human psychology. This is where advisers exhibit great value.
Advisers are not just portfolio constructors; they are behavioural coaches. No matter how meticulously one sets assumptions around savings, retirement age or risk appetite, the plan will disintegrate if emotions rampage during market stress. The most costly mistakes tend to be the simplest: panic selling at market lows, chasing returns at peaks or abandoning a long-term plan when the outlook turns bleak.
Nassim Taleb’s concepts of fragility, robustness and antifragility provide a useful framework for thinking about portfolio characteristics. A fragile portfolio breaks under pressure, whereas antifragile portfolios, typical of certain hedge funds, thrive on chaos. At PortfolioMetrix, we do not seek antifragility, instead we build robust portfolios—designed to withstand stress and deliver steady performance over time. Success, in this context, is not defined by spectacular wins but rather by avoiding debilitating losses.
The numbers illustrate the issue plainly. Over the past 20 years, equity investors earned an average annual return of 9.2%, while the S&P 500 delivered 10.4%, resulting in a persistent behaviour gap.
Meanwhile, the “Guess Right Ratio,” which measures the accuracy of investors’ market predictions, indicates that since 2015, investors have been unable to surpass the odds of flipping a coin (50%).
Figure 2: DALBAR (2023 QAIB Report)
Unsurprisingly under stress, behaviour worsens. In 2020, the largest equity outflows occurred just before a double-digit rally in November (Figure 3). And in 2024, investors sold equity funds continuously throughout a strong market rally, with the most significant outflows happening just before major gains. Exiting at these moments translates to locking in losses and missing the recovery—compounding the cost of emotional decisions.
Figure 3: DALBAR (2021 QAIB Report)
Modern markets exacerbate the problem. Real-time data and headlines provoke instant reactions. The 2024 market recovery happened so quickly that many investors missed it entirely. The lesson is clear: the more reactive an investor becomes, the more they sabotage their outcomes.
Figure 4: MFS (Principles of Long-Term Investing Resilience)
The solution lies not in better market timing, but in superior portfolio design and guidance. Diversification is often discussed in the context of optimising risk and return, but it also serves as a behavioural guardrail by smoothing short-term volatility. This combined with advisers` ability to enforce pause, perspective and process creates the discipline necessary for wealth creation.
A consistent portfolio experience cultivates long-term commitment—because investing, at its core, is an exercise in patience. Just as roots establish themselves across seasons, not days, portfolios compound across cycles, not quarters. Dig up your investments with every market tremor, and you guarantee stunted growth. Leave them anchored, and they weather volatility naturally.
The South African Reserve Bank (SARB) cut the repo rate by 25 basis points to 7.25% to support the economy. The decision was influenced by lower oil prices, a stronger rand, as well as reducing global and local uncertainties. A potential 3.0% inflation scenario was also discussed, however achieving this would require fiscal discipline, controlled wage growth, and price alignment.
South Africa’s President, Cyril Ramaphosa, visited Washington to reset relations with the Trump administration. His efforts included strong rebuttals on accusations, supported by DA leader John Steenhuisen. Nonetheless, Ramaphosa described his meeting with Trump as both robust and fruitful, highlighting a renewed commitment to continued engagement, particularly in trade and industry. Discussions will further focus on investment, tariffs, and market access under AGOA.
South Africa’s unemployment rate rose to 32.9% in the first quarter of 2025, up from 31.9% the previous quarter. This rise highlights ongoing economic struggles, with the youth being particularly vulnerable. Despite recent reforms, structural issues such as skill gaps and labour market inflexibility continue to hinder job creation and economic recovery efforts.
The Federal Reserve kept interest rates steady at 4.25%-4.50%, acknowledging that risks of higher inflation and unemployment have increased since March, partly due to Trump`s trade policies. Fed Chair Jerome Powell emphasized that their current policy is adaptable to changing economic conditions. Despite recent data anomalies from potential tariffs, the economy continues to expand moderately. This decision aligned with market expectations.
The Bank of England cut its key interest rate from 4.5% to 4.25% in May 2025. This was the second rate cut of the year, driven by sluggish economic growth, uncertainty over President Trump’s trade tariffs, and slowing inflation. Although investors expect further cuts, a cut at June’s meeting now seems less likely. The UK economy also reported a 0.7% expansion for Q1, marking its strongest growth in a year.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2354″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
US Inflation
In April, the U.S. Consumer Price Index (CPI) showed a 0.2% month-over month increase, slightly below expectations, with year-over-year inflation cooling to its lowest level since early 2021. Despite recent tariff reductions, the long-term impact remains uncertain, and inflationary pressures are expected to increase. As a result, U.S. consumer sentiment fell in May due to rising inflation expectations influenced by President Trump’s trade policies.
What We Know for Sure: How Uncertainty Distorts Decision-Making
Geopolitical risk is grabbing headlines again. In today’s investment climate, it’s tempting to fixate on the big geopolitical question marks: Will Trump’s policies unseat the US dollar as the global reserve currency? How far will China go in asserting regional / global dominance? Can Europe hold its fragile unity? These are captivating storylines, but they come with a trap—they’re unknowable. For advisers guiding clients through volatility, the smarter conversation is not about what might happen, but what we know is already true.
And what we know is this: uncertainty has real economic costs, but its effects don’t always translate predictably into markets. Markets don’t always behave the way we’d expect.
The Real Cost of Uncertainty
When the policy environment becomes unpredictable—when rules change abruptly, processes are bypassed, or institutions lose their footing—companies hesitate. Long-term investment plans are postponed. Hiring slows. Supply chains are re-evaluated. The decision to locate production in one country over another might hinge not on cost, but on clarity and consistency of regulation. Companies don’t stop because they’re pessimistic. They stop because they can’t model the future.
This is not hypothetical. The chart below shows the Global Economic Policy Uncertainty Index, which has surged to unprecedented highs recently, surpassing even the peaks of the global financial crisis and the COVID pandemic. These are not isolated blips; they reflect sustained anxiety over trade tensions, geopolitical fragmentation, and unpredictable policy shifts. Studies by the Federal Reserve and the IMF have shown that investment spending slows sharply when policy uncertainty rises.
Figure 1: Global Economic Policy Uncertainty Index
It’s not just about tariffs or taxes; it’s about whether the rules of the game will still apply next year. Consumers, too, respond to policy fog by tightening their belts. They delay buying homes or cars. They stay in their jobs longer. The cumulative effect of deferred decisions can quietly sap growth from the real economy.
Institutions Matter More Than Forecasts
If we can’t forecast policy, what can we trust? The strength of institutions.
Independent central banks, predictable legal systems, and transparent regulatory processes are not exciting headline topics—but they’re the foundations of investor confidence. They reduce uncertainty by anchoring expectations, even when the political cycle is noisy.
This is why investors differentiate sharply between countries that have robust institutions and those that don’t. It’s not just about GDP or debt levels; it’s about trust in the system. Strong institutions turn ambiguity into risk—something markets can price. Weak institutions turn it into uncertainty—something they can’t. Credibility, not just numbers, matters.
Arbitrariness Is More Damaging Than Bad Policy
Ironically, even bad policy can be better than arbitrary policy. Poor decisions can be modelled, priced, and accounted for. Arbitrariness cannot. When companies feel that decisions are driven by personalities, short-term political pressure, or opaque backchannels, they lose the ability to plan.
This is as true for global multinationals as it is for mid-sized firms trying to navigate cross-border operations or shifting tax codes. The drag on capital expenditure, hiring, and innovation is not ideological—it’s operational. Uncertainty doesn’t discriminate.
Wall Street Is Not High Street
But here’s the paradox: even when uncertainty drags on the real economy, markets may shrug—or even rally.
Why?
Because markets are forward-looking. They don’t trade on how the real economy feels today; they trade on how it might evolve six, twelve, or twenty-four months from now. Sometimes they anticipate a policy breakthrough. Sometimes they expect a rate cut. Sometimes, frankly, they just have too much liquidity chasing too few assets.
This disconnect between High Street and Wall Street can be confounding. A company may be cutting jobs while its share price soars. A country may be in recession while its stock market hits all-time highs. These are not contradictions—they’re reflections of different timeframes, different incentives, and different mechanisms of price discovery.
For advisers, the lesson is not to ignore the economy, but to recognise that understanding it does not automatically yield insight into markets. Clients who believe that “the bad news hasn’t hit the market yet” may not realise that markets already priced it—or have chosen to look past it.
The Adviser’s Role: Framing, Not Forecasting
This is where the adviser becomes indispensable—not for predicting the next twist in monetary policy or geopolitics, but for helping clients frame their decisions appropriately.
What do we know?
• Uncertainty tends to reduce real-world investment appetite.
• Strong institutions reduce uncertainty and support long-term confidence.
• Markets can rally even when the economy is soft—because they’re forward-looking.
• Composure and diversification remain the strongest defences against arbitrary shocks.
Trying to “trade” uncertainty is a fool’s errand. Building a strategy that acknowledges it, adapts to it, and remains robust through it—that’s a different story.
Conclusion: Stick to the Plan
In uncertain times, there is often a hunger for certainty. But the wise investor—and the wise adviser—knows that chasing certainty is not the same as managing risk.
The client who reads today’s headlines and wants to change their portfolio is not irrational—they’re human. The adviser who can separate story from signal, speculation from structure, isn’t just delivering performance, they’re delivering perspective, adding value far beyond the latest market update.
The takeaway is not to disengage from the world—but to interpret it more intelligently. We don’t need to know how the story ends to know how to stay in character.
The high court’s suspension of the proposed VAT increase has triggered questions around the Treasury’s credibility and the cohesion of the GNU. Finance minister Godongwana’s backpedaling on the VAT hike, after earlier signalling commitment, has deepened investor concers over fiscal consistency and policy follow-through. The ANC has since called for a more structured approach to GNU decision-making, highlighting cracks in the ruling alliance. Consumer confidence plunged to multi-year lows, and the Rand remains vulnerable amid continued political and fiscal ambuguity.
Rate-Cut Bets Rise as Inflation Falls to Five Year Low
Headline inflation eased sharply, prompting traders to ramp up expectations of a SARB rate cut. With CPI now at its lowest level in nearly five years and the private sector in a protracted slowdown, calls for monetary easing have grown louder. However, SARB Governor Kganyago remains cautious, citing global risks and domestic vulnerabilities including load shedding and tariff impacts. Retail sales and mining data both disappointed, and leading indicators signal a deteriorating growth backdrop despite improved trade data and firmer reserves from elevated gold prices
Growth Forecasts Cut Amid Structural and External Pressures
South Africa’s 2025 GDP growth projections have been revised downward by several institutions. The IMF now forecasts 1.0% growth, down from 1.5%, citing escalating U.S. trade tariffs and global uncertainty. The South African Reserve Bank (SARB) adjusted its estimate to 1.7%, acknowledging subdued demand and persistent supply-side constraints. Private sector analysts, including Moody’s and the Bureau for Economic Research, have also lowered their forecasts to approximately 1.5% . These revisions reflect ongoing challenges: weak business confidence, high unemployment, and underperforming industrial sectors. While inflation has eased, offering potential for monetary policy support, structural issues continue to hinder robust economic recovery.
The U.S. economy contracted by 0.3% in Q1 2025, marking the first decline since early 2022. This unexpected downturn was primarily driven by a surge in imports as businesses and consumers accelerated purchases ahead of new tariffs introduced by President Trump, leading to a significant trade deficit. While consumer spending and business investments provided some offsets, economists warn of potential further weakening throughout the year. The Federal Reserve maintained interest rates at 4.25% to 4.5%, citing concerns over inflation and the economic impact of ongoing trade tensions
The Eurozone economy grew by 0.4% in Q1 2025, doubling the previous quarter’s pace and exceeding forecasts. Ireland and Spain led the growth, while Germany and France showed modest recoveries. However, the introduction of U.S. tariffs poses significant risks to future growth, with early indicators suggesting a potential slowdown in the coming quarters[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2354″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
Global Trade Disruption Peaks, but Trump Softens Rhetoric
April marked the most volatile phase yet of Trump’s trade war, with tariffs imposed across nearly all major partners — China, EU, UK, and parts of Asia. However, late in the month, Trump surprised markets by floating a substantial rollback on China tariffs in exchange for a new trade deal, citing economic risks. Equities initially sold off but later rebounded as the VIX recorded a historic plunge. The flip-flop in U.S. trade policy has created whiplash across global markets, with companies, central banks, and policymakers scrambling to adapt to the unpredictability
[vc_row][vc_column width=”1/1″][us_post_date format=”jS F Y” css=”%7B%22default%22%3A%7B%22font-size%22%3A%2211px%22%7D%7D”][us_post_title tag=”h4″ css=”%7B%22default%22%3A%7B%22color%22%3A%22_header_middle_bg%22%2C%22text-transform%22%3A%22uppercase%22%2C%22background-color%22%3A%22%23c25adb%22%2C%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D”][us_post_image thumbnail_size=”full”][/vc_column][/vc_row][vc_row height=”auto”][vc_column width=”4/5″][us_separator size=”small”][vc_column_text]Is the S&P 500 Equal Weighted Index the solution you think it is?
The S&P 500 is widely regarded as one of the best gauges of US Equities and the global stock market, representing almost 65% of the MSCI ACWI (All Country World Index). However, investors are becoming increasingly concerned about the extreme concentration risk that is present within the index due to the Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla).
Currently, the Magnificent 7 make up 32% of the index. This concentration means that when you invest in the S&P 500, a significant portion of your money is placed in just a handful of companies.
Recently, there has been a popular trend with investors turning to the S&P 500 Equal Weighted Index (EWI) as the solution to this concentration risk. The equal weighted index weights each stock at 0.2% regardless of its market capitalisation. At first glance it looks like an excellent way to reduce the concentration risk of the Magnificent 7, as no single company can dominate, resulting in the EWI often being seen as a cheap, passive diversifier in your portfolio.
In reality, the EWI is not a simple passive fund allocation, as it carries large active exposures resulting in your portfolio swapping one risk with several others.
The reality of the S&P 500 Equal Weighted Index
When you invest in the EWI, you significantly change your sector exposure. The Technology sector weight is reduced by 16% which is then reallocated to cyclical sectors such as Industrials (+7%), Utilities (+3.8%) and Materials (+3.2%). This is an active decision represented as a low conviction in growth sectors and a high conviction in cyclical sectors that typically show greater sensitivity to economic cycles and downturns.
Source: S&P Global
The S&P 500 is predominantly a large cap index with only 18% of the index made up of mid-cap companies. In comparison, the S&P 500 Equal Weighted Index reduces your large cap exposure from 81% to 32%, meaning that mid and small cap stocks make up 68% of your investment. This shift exposes you to companies that are typically more volatile. Over the past 5 years the volatility of the S&P 500 was 16.9% compared to the 18.1% of the EWI, a material difference.
Small and mid-cap companies absolutely deserve a place in a well-diversified portfolio. However, the extent of your exposure should be a deliberate decision aligned with your risk tolerance and investment objectives, not an unintended outcome due to your index selection.
The EWI’s shift in market cap is brought about by implicitly saying you have more conviction in each of the 398 companies that you upweighted than the 99 companies that you downweighed to 0.2% resulting in an active bet on smaller companies. While smaller companies may offer growth potential, their higher volatility introduces specific risks that should be consciously incorporated into your investment strategy rather than adopted by default through an equal-weighted approach.
Finally, to maintain the weights of each company at 0.2%, the EWI requires frequent rebalancing which can drive up annual charges. When comparing Invesco’s S&P 500 and S&P 500 Equal Weighted ETFs the difference in annual charges are 0.12%.
Does the Equal Weighted S&P 500 protect you in market downturns?
If the goal is to protect yourself against market downturns, the S&P 500 Equal Weighted Index has offered mixed results. During major market crises over the past 20 years, the EWI has experienced similar drawdowns in all major market events.
Source: Morningstar Direct
This happens because you have increased your exposure to mid and small cap companies which often have less financial resilience and liquidity in times of economic stress and given the increased exposure to these companies in the EWI, your portfolio would be more exposed. The increased cyclical sector weights of the EWI can further amplify sensitivity to economic cycles.
Although the S&P 500 Equal Weighted Index has outperformed the S&P 500 since inception, it has underperformed over most time periods since then.
Should you instead turn to active managers?
We looked at the performance of active Managers against the S&P 500 Equal Weighted Index over the past 20 years. What became apparent was that in periods of market stress and higher volatility, active managers, who have the ability to change their positions based on the current market conditions, often outperformed the EWI. This is because active managers can reduce their exposure in companies and sectors that are particularly vulnerable during downturns, unlike the EWI which is forced to hold each position at 0.2%.
The S&P 500 Equal Weighted Index is seen as a simple solution to the concentration risk in the market. However, as we have shown, it represents meaningful active bets on smaller companies and cyclical sectors. To diversify against the concentration risk in the market, a good active fund may present a better opportunity than the simplicity of the EWI. Simplicity holds a premium, all else equal. However, as Einstein mentioned “Everything should be made as simple as possible, but not simpler.” The meaningful risks the EWI represents needs to be considered explicitly and intentionally rather than as a price to pay for simplicity.[/vc_column_text][us_separator][vc_column_text]
The 2025 National Budget presented by Finance Minister Enoch Godongwana in March, after being delayed in February, has faced hurdles to acceptance and highlighted the fragility of the GNU. The announcement of a VAT increase to 16% by 2026/27, coupled with the decision not to adjust personal income tax brackets for inflation, is expected to raise R62 billion in extra revenue. However, these measures have faced substantial political backlash, with opposition parties contesting the tax increases. This political tension has created uncertainty, impacting investor confidence and putting pressure on the rand.
South Africa’s economic growth of 0.6% in 2024 has been disappointing, reflecting ongoing business challenges. The RMB/BER Business Confidence Index remained unchanged at 45 points in Q1 2025, showing persistent caution among businesses. Despite a slight easing in the business downturn (S&P PMI), the manufacturing sector remains in contraction, and the trade balance has swung to a deficit. These factors highlight the fragile state of the economy, with businesses and investors wary of growth prospects. While the National Treasury expects a rebound in GDP growth between 2025 and 2027, current indicators suggest a cautious outlook.
Political and trade tensions have been significant drivers of market sentiment in South Africa. The expulsion of South Africa’s ambassador from the USA and the imposition of 30% tariffs by President Donald Trump have strained international relations and added to the economic uncertainty. Domestically, the political backlash against the budget, particularly the VAT hike, has further fuelled instability. Consumer confidence has plunged to multi-year lows, reflecting public discontent with the economic and political landscape. Additionally, the rand has come under pressure amid these uncertainties, and South African bonds have hit 22-month high yields. These tensions underscore the challenges facing the country as it navigates both domestic and international pressures.
The US imposed new import tariffs in March on its key trading partners which included China, Canada and Mexico. Tariffs on Chinese goods reached 20% by the end of March while Canada and Mexico reached 25%. Subsequently, further tariffs on almost all trading partners were announced in early April. Adjustments to these continue to emerge, but since these announcements, there has been a noticeable decline in US equities, US bond yields have risen and the US dollar has weakened.
Germany relaxed its government debt borrowing limits in March, enabling increased expenditure on defence to above 1% of GDP and a new €500 billion infrastructure investment fund. This fiscal easing enhanced Europe’s growth outlook, resulting in positive equity performance over the quarter.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2355″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
Fed Policy Delays
The US Federal Reserve delayed rate cuts in March keeping the base rate at 4.25-4.5% citing ongoing concerns over inflation and slow GDP growth. This decision, alongside the tariff related uncertainty, increased market volatility during the month. Despite this volatility, the market expectations for rate cuts started and ended the month at the same point with only 3 rate cuts expected for 2025.
Trump 2.1: Markets Grapple with the Dualities of Growth and Uncertainty
President Trump’s re-election in late 2024, often dubbed “Trump 2.0”, initially sparked a renewed sense of American exceptionalism. While his return to office has generated far more excitement and action than his first term, this period has also seen several notable market responses, alluding to a shift in economic dynamics; with the most recent downturn of the stock market re-affirming that “the only certainty Trump offers is uncertainty”.
The initial surge in stock prices reflected investor optimism about policies aimed at growth, deregulation, expenditure cutting, and revenue generation. Markets subsequently anticipated higher yields and a stronger US dollar. However, the Treasury Secretary has mentioned that the administration is focussed on reducing the 10-year yields – which have in fact come down since Trump`s inauguration along with the strength of the dollar and oil prices.
Figure 1: Lower yields, a weaker dollar and moderating oil prices have been achieved since Trump`s inauguration (Bloomberg).
If lower yields and energy prices are sustained in the context of tax cuts and deregulation – and despite the looming effects of tariffs, could this lead to a strong upside for the economy? For now, the bullish “Trump trade” – has run out of steam, as investors have grown sceptical of Trump’s directives. Concerns about potential trade wars and international instability have tempered the initial market enthusiasm, creating a more cautious outlook. This shift in sentiment underscores the challenges of balancing short-term market reactions with the long-term implications of policy decisions.
Figure 2: Across asset classes, market enthusiasm has dissipated on Trump 2.1 (Bloomberg).
The market’s risk-off sentiment has been exacerbated by tariff anxiety. Investors are wary of the negative impacts of tariffs on global trade and economic growth. Domestic firms face higher input costs, which could offset the benefits of increased output. Meanwhile, US consumers are anticipating higher costs and reduced real incomes, as evidenced by a decline in consumer sentiment. This development highlights the conflicting interplay between America-first policies and economic performance. That said, if a deregulatory boost materialises it could provide some growth stimulus, with small caps positioned to benefit the most.
Figure 3: US consumer confidence dropped by the most since August 2021, on concerns about the future of the economy (Consumer Conference Board, Bloomberg).
It is worth noting that for inflation to become a significant problem, it would require sustained increases in prices rather than a once-off rise due to tariffs, as well as increasing consumer demand. If tariff-induced price hikes do lead to short-term inflation, the resulting economic slowdown could reduce inflationary pressures and lower commodity prices. However, recent US data signalling rising inflation and slowing activity has introduced the potential for stagflation – a dreaded scenario characterised by stagnant growth and high inflation.
Undoubtedly, Trump’s on-again, off-again tariffs are dominating market movements, spurring elevated levels of volatility and uncertainty. A gauge of global trade-policy uncertainty has reached its highest level in more than six decades, surpassing the previous peak in 2018 when Trump targeted China. Amidst this backdrop of uncertainty, Fed Chair Jerome Powell reiterated the central bank’s view that the economy remains steady. Powell emphasised that the Fed would not allow Trump’s policies to inform monetary policy decisions until it could assess the full impact of those policies on the economy. The Fed’s independence remains a critical factor in maintaining economic stability, even as political pressures mount.
Figure 4: Global Economic Policy Uncertainty has reached an all-time high (Global Trade Policy Uncertainty Index, Econovis).
The juxtaposition of hope and fear surrounding the world’s largest economy has created a complex landscape for investors to navigate. On one hand, the administration’s focus on growth, deregulation, and efficiency has the potential to stimulate economic activity and boost corporate profitability. On the other hand, the unpredictability of policies and the risk of escalating trade conflicts introduce significant uncertainty. The interactions between policy measures, market reactions, and economic fundamentals has resulted in a challenging environment for decision-making.
While the initial optimism has been tempered, from an investment perspective, the need for a strategic and diversified approach to investment remains paramount to ensure that portfolios are not adversely affected by passing storms while identifying opportunities in changing tides. Diversification across asset classes, sectors, and geographies will be key to managing risk and capitalising on potential gains presented by the Trump 2.1 era.[/vc_column_text][us_separator][vc_column_text]
The finance minister was scheduled to present the first budget under the new coalition government but delayed it after the cabinet did not reach a consensus on the proposed increase in VAT. This is the first delay since South Africa became a democracy, and investors did not take lightly to the news. The disagreement underscored tensions within the GNU, but Minister Godongwana emphasized that cabinet members need to consider the trade-offs necessary to fund the country’s expenditures.
After nearly a year without load shedding, South Africans experienced two setbacks in February. Eskom`s CEO emphasized that structural improvements in the generation fleet have mitigated load shedding issues, though baseload capacity remains constrained. If these unplanned outages persist, South Africans are speculating its impact on economic activity.
South African inflation rose to 3.2% in January from 3% in December following changes in the inflation basket. The uptick has raised concerns about the country’s inflation outlook particularly in the context of Trump administration policies. The SARB Governor cautioned that tariffs could interrupt the disinflation process, thereby potentially reversing the trend of lowering interest rates.
President Trump announced a series of universal tariffs on steel and aluminum, alongside targeted tariffs on specific countries. Tariffs on Canada, Mexico, and China have already been implemented, prompting retaliatory measures. This development signals a further escalation in trade tensions, which could exacerbate global inflationary pressures.
U.S. consumer confidence reached its lowest level since August 2021. The sharp drop was accompanied with rising inflation expectations, reflecting increasing concerns over potential negative impacts from the Trump administration. Economists pointed out that unprecedented federal worker layoffs were affecting consumer sentiment and posing risks to spending, which is the main driver of the economy.[/vc_column_text][/vc_column_inner][/vc_row_inner][us_separator size=”small”][vc_row_inner content_placement=”middle”][vc_column_inner link=”%7B%22url%22%3A%22%22%7D” css=”%7B%22default%22%3A%7B%22padding-left%22%3A%2210px%22%2C%22padding-top%22%3A%2210px%22%2C%22padding-bottom%22%3A%2210px%22%2C%22padding-right%22%3A%2210px%22%7D%7D” width=”1/6″][us_image image=”2354″ align=”center” link=”%7B%22url%22%3A%22%22%7D”][/vc_column_inner][vc_column_inner width=”5/6″][vc_column_text]
UK Inflation
UK inflation increased to a 10-month high at the beginning of this year, deterring the Bank of England from cutting rates more aggressively. Specifically, consumer prices rose to 3% in January, up from 2.5% in December. This came as UK household confidence hit a new low under the Labour party
January saw a major shake-up in the artificial intelligence (AI) investment landscape. A relatively unknown Chinese tech start-up, DeepSeek, announced the release of R1, an open reasoning large language model (LLM). The R1 model matches the performance of o1 (OpenAI’s frontier reasoning LLM) across math, coding and reasoning tasks, at a fraction of the cost while using inferior Nvidia chips.
DeepSeek claims R1 cost $5.6m to develop, paling in comparison to western developed models. The final training run for the latest Llama model from Meta was 10 times the cost, while just last year, Dario Amodei, the co-founder of leading AI firm Anthropic, put the cost of training advanced models at between $100m and $1bn.
Much of Nvidia’s recent meteoric rise had been built on the back of these high earnings expectations tied to AI development. However, the emergence of a competitor like DeepSeek has challenged this narrative. If AI models can be developed using more cost-effective alternatives, investors would need to relook at their assumptions around Nvidia’s long-term earnings growth prospects.
Marc Andreessen, a prominent US venture capitalist, likened the launch of the R1 model to a pivotal moment in the US-USSR space race. He described it as AI’s “Sputnik moment”, referring to the Soviet Union’s surprising achievement of launching a satellite into orbit during the Cold War.
The market reaction was swift and unforgiving. Nvidia lost $589 billion of market capitalisation. This is larger than the individual market values of all but 13 US companies and is by far the largest single-day value wipeout of any company in history.
Figure 1: Biggest one-day drops in market capitalisation, $bn, for US companies
All That Glitters Is Not Gold
The rapid shift in the dynamics of the AI sector is a stark reminder of the dangers and heightened volatility while investing in trending themes of the moment. Thematic investing, while exciting, is often unpredictable. History is full of similar examples — from the dot-com boom to alternative energy, biotech funds, and more recently, artificial intelligence and big data.
According to Morningstar, assets in thematic funds have almost doubled in the last five years to June 2024, up from $269 billion to $562 billion, but down from their peak of $892 billion during the covid pandemic. Meanwhile, the number of live funds has more than doubled in those five years, with 2,776 options to choose from.
A study by the academics — Itzhak Ben-David, Rabih Moussawi, Francesco Franzoni and Byungwook Kim — suggest that the very worst time to buy thematic ETFs, is when they launch. That is principally because the funds tend to launch when the hype is at its peak, and just before performance declines. The full case study can be found here.
Figure 2: Cumulative risk-adjusted return of underlying indices (%)*
Research from Morningstar also shows that thematic investing is fraught with potential risks. Investors are, in effect, making a Trifecta bet; one where they must pick the right theme, the right fund provider to successfully implement that theme, and then getting the timing right. None of these three elements are easy, let alone getting all three right at the same time.
In fact, 60% of thematic funds launched in the last 15 years have shut down, and only 9% have both survived and outperformed a global equity benchmark.
Figure 3: Global Thematic Fund Survival and Success Rates vs. Global Equities
Recent market turbulence demonstrates this theme specific risk. AI-focused ETFs with large Nvidia and other AI-related stock exposures experienced significant declines. The ProShares Ultra Semiconductors ETF, with more than 40% of its assets in Nvidia, plunged over 24% in a single day. The Vanguard Information Technology Index Fund, where Nvidia represents nearly 15% of the portfolio, dropped 5.25%. Meanwhile, the VistaShares Artificial Intelligence Supercycle ETF, with a more diversified AI stock portfolio but 3% exposure to Nvidia, saw losses of about 10%. These sharp declines highlight the vulnerability of thematic investments to sudden market shifts.
At PortfolioMetrix, we avoid chasing trends. Instead, we aim to build resilient, well diversified portfolios designed to withstand market shifts, ensuring clients stay focused on long-term success rather than short-term speculation. Our approach enables us to protect and grow wealth according to each investor’s risk profile, irrespective of what the latest market fad is.[/vc_column_text][us_separator][vc_column_text]
The SARB cut rates 25bp at the third consecutive meeting in January to take the repo rate down to 7.50%. Between now and the end of 2025, it seems unlikely that the SARB will cut again unless the market’s reaction to the tariff imposition by the Trump administration subsides. Financial markets will experience turmoil, risk appetite will evaporate, and riskier investment destinations such as SA will suffer. A tumultuous period for the ZAR could undermine the SARB’s inflation-fighting efforts and ensure a much more conservative monetary policy stance through the months ahead.
CPI data came in notably softer than expected. Headline consumer inflation ticked up from 2.9% y/y to 3.0% y/y in December, compared to market expectations for a larger increase to 3.2% y/y. However, there is reason to be cautious, as NERSA granted a 12.7% electricity tariff hike for 2025-26 which could see spikes in upcoming inflation data.
SA has been caught in President Trump’s crosshairs, with an executive order that the US will halt all aid to SA over its controversial land law signed off by President Ramaphosa. That is a damning indictment of what foreigners might think of SA’s local political stance, let alone their position on issues relating to Russia and Palestine.
The Fed opted to keep interest rates unchanged at 4.25% – 4.5%, pausing further cuts to assess inflation trends and economic conditions. The decision was unanimous and follows a full percentage point reduction since the US kicked off its monetary easing cycle in September. More notably, the statement included hawkish changes such as removing prior acknowledgement of inflation progress to officials now saying inflation remains “somewhat elevated” and that unemployment has “stabilised at a low level”. These changes suggest that the Fed may delay further rate cuts.
Weak inflation and downside risks to growth in the Eurozone supported the case for a 25bps rate cut, with more expected in the months ahead. However, future ECB decisions may begin to be more contentious as the neutral policy rate comes into sight.
Trump enters the white house with tariffs high on the agenda, acknowledging that, in the short term, Americans might suffer some discomfort and pain, but he believes that the long-term results will be worth it. The US is focusing on America first and will want to pay as much attention as possible to becoming self-sufficient and encouraging domestic manufacturing production.
New Year, Not So New US President: Trump 2.0, Tariffs & Inflation
We enter a new year with Donald Trump set to return to the White House on January 20th. Despite this being a couple of weeks away, the incoming President has made plenty of headlines with his “America First” agenda, particularly his threats of tariffs on a number of US trading partners – with China, the Eurozone, Canada and Mexico all being targeted over December. This month, we examine what a trade tariff is, the tariffs Trump has threatened and their potential impacts on markets and inflation, and how we are managing these risks in portfolios.
Understanding Trade Tariffs
In simple terms, a trade tariff is a tax imposed on goods and services imported from another country. The tax raises the cost of these imports, making them less attractive to domestic consumers. Tariffs can serve various purposes such as protecting domestic industries, generating revenue or exerting political leverage.
What Trade Tariffs has Trump Threatened?
Donald Trump continually referred to tariffs over the course of his campaign and has continued to do so since his election victory in November – at one point even referring to tariffs as “the most beautiful word in the dictionary”. Over this period, he has threatened tariffs against several nations such as:
A 25% Tariff on all goods imported from Mexico and Canada in response to irregular border crossings and drug trafficking
Up to 60% Tariff on all goods imported from China to raise revenue and increase manufacturing jobs in the United States
Tariffs on the European Union if the bloc does not address the “tremendous” trade deficit with the United States. Most recently demanding the EU purchases more US oil & gas.
100% Tariff on BRICS nations (a group of 9 countries which includes Russia, Brazil & China) if they try to replace the US dollar as the global reserve currency.
At this stage, all of these proposals are just threats, and history has shown that rarely do all proposed policies make it into law. During his previous presidency, Trump only implemented tariffs on 14% of goods imported to the US, despite promising tariffs on 100% of imported goods.
However, should Trump implement all tariffs he has threatened so far, it would take the effective tariff rate in the US to around 10% – the highest since the 1940s.
Impact on Inflation, Markets & Portfolio Positioning
Market commentators and economists have written at length about the negative impacts of the tariffs threatened by Trump on the Global Economy, Inflation and Financial Markets. This is despite the fact the actual tariffs at this stage remain completely unknown.
Donald Trump’s tariff threat adds to fears over China growth
One major area of concern is the additional inflationary pressures tariffs may exert on the US economy – at a time when the US Fed is still grappling with bringing inflation back to its 2% target. The majority of Economists estimate that in a worst-case scenario, where Trump imposes 60% tariffs on China, and 20% on imports from the rest of the world, inflation could be between 0.5% and 3% higher in 12 months’ time.
While these estimates may seem scary at a headline level, it’s important to remember these predictions are based on worst case scenarios and as history has shown us, US Presidents are almost never able to push through all the policies they would like to – not even Donald Trump. So, the worst-case scenario appears unlikely.
It’s also important to remember that economist forecasts ignore the other components of inflation that aren’t impacted by tariffs, such as shelter. Shelter has historically been a large contributor to inflation in the US (dark blue areas below), and one which economists have consistently forecasted incorrectly. This serves as a reminder that the overall inflation picture is much more complex than tariffs alone, and being overly focused on a single factor may result in another factor being missed completely.
Forecasting the impact of Trump’s Tariffs and the impact on portfolios therefore, requires you to firstly, correctly predict the actual tariffs that are implemented, and secondly, correctly predict how the market will react to them. Both of these are near impossible tasks, and we have seen time and time again, that markets do not always react in the way you would expect them to. On top of this, and at the same time, one must hope no other surprises occur over the same time period.
What does appear clear is that tariffs are coming, and this will likely bring market volatility with it as they are announced. However, all other market participants know this too, and given markets are somewhat efficient, tariffs will have already been partially priced in. Therefore, if tariffs are lower than expected, the impacted markets may actually perform quite well.
So, instead of trying to predict who the winners and losers will be from Trump’s Tariffs, we prefer to focus on understanding the risks within portfolios and ensuring that portfolios aren’t over or underexposed to single macro-related events. By maintaining diversification across asset classes, and not introducing binary bets into portfolios, we aim to give your portfolios the best chance of performing well regardless of what markets (or Trump) throws our way.[/vc_column_text][us_separator][vc_column_text]
The SARB cut rates 25bps at the second consecutive meeting to take the repo rate down to 7.75%. Still, with inflation set to remain subdued and close to the 3% lower limit of the inflation target range in the next two months, the SARB will have room to ease monetary policy a little further.
Eskom successfully reconnected the second unit of the Koeberg nuclear power plant to the national grid after a significant refurbishment. This achievement enhances South Africa’s electricity supply, marking nine months of uninterrupted power and boosting business confidence.
The South African rand traded around 18.9 per USD, its lowest level since early June, largely due to the strength of the dollar. A significant pullback in December, following the re-election of Donald Trump as U.S. president, caused the rand to relinquish its year-to-date gains, ending 2024 down by approximately 3%.
The US Federal Reserve (Fed) cut interest rates by 0.25% to the range of 4.25 – 4.5% in December, however signalled a slower pace of rate cuts were likely for 2025. Jay Powell, Federal Reserve Chair, pointed to inflation moving sideways and diminished risks to the labour market as the reason behind the more hawkish tone. Markets now expect only 2 rate cuts in 2025. Global equity and bond markets fell in response, with smaller companies falling more than larger companies.
China continues to look to ways to stimulate their slowing economy. In December, Chinese leaders changed their monetary policy stance to moderately loose from prudent for the first time in 14 years. Stocks and bonds both rose on the news as it appears policy makers are taking the situation in China more seriously, and are now actively looking to implement more proactive fiscal policy and moderately loose monetary policy.
German Chancellor, Olaf Schalz, lost a vote of No Confidence in mid December, paving the way for the dissolution of parliament in the Eurozone’s largest economy. The vote comes at a challenging time for the German economy, with weakening economic data, the threat of tariffs from the US, and political turmoil elsewhere in Europe. The collapse came in response to disagreement over future spending on infrastructure, defence and social care.
