Volatility abounds: What's next for markets and economies in 2025?

Central banks are expected to lower cash rates gradually in 2025. 

With inflationary pressures moderating and economic challenges persisting, monetary authorities are expected to prioritise gradual rate cuts as we move through the remainder of 2025.

This deliberate pace reflects a balance between stimulating economic growth and avoiding financial instability. For example, the Federal Reserve and the European Central Bank may follow similar trajectories, ensuring financial markets remain stable while supporting growth. Emerging markets could also adopt a more measured approach, leveraging lower rates to foster domestic investment without risking currency depreciation.

Historical precedents, such as the response to the 2008 financial crisis, underline the importance of cautious monetary easing in sustaining long-term recovery.

Bonds to deliver attractive real yields

As inflation retreats, bonds are positioned to deliver attractive real yields. Investors seeking stability and protection against potential equity market volatility are likely to gravitate toward bonds. This trend is further supported by the increasing likelihood of central banks maintaining accommodative policies, ensuring demand for fixed-income securities remains robust. Notably, institutional investors are expected to play a pivotal role in bolstering demand this year, given the current alignment of macroeconomic trends with bond market dynamics.

Property market recovery

The property market’s recovery is set to gain momentum, underpinned by declining interest rates and greater access to credit. Renewed consumer confidence, coupled with investor optimism, will likely drive activity in both residential and commercial real estate sectors. Key growth areas include affordable housing projects in urban centres and commercial properties tailored to evolving work and lifestyle preferences, such as co-working spaces and mixed-use developments. Data from leading real estate analytics firms indicate that emerging markets may outperform in property returns, driven by urbanisation trends and infrastructure investments.

Global equity markets

Global equity markets, particularly in emerging economies, are forecast to outpace US equities. Factors such as stronger gross domestic product growth, favourable currency movements, and more attractive valuations contribute to this outlook. Regions like Asia and Latin America stand to benefit from robust demand for technology, green energy, and infrastructure investments. In Asia, countries such as India and South Korea are positioning themselves as leaders in technology and innovation, with substantial investments in artificial intelligence, robotics, and renewable energy. These nations are also benefitting from a shift in global supply chains, as businesses diversify away from China, further boosting growth prospects.

Latin America, on the other hand, is seeing increasing demand for commodities and infrastructure development, particularly in markets like Brazil and Mexico. These countries are also benefiting from higher global interest in green energy, as they have abundant natural resources for clean energy production.

By contrast, US equities may face headwinds from high valuations and slower economic growth. For instance, the MSCI Emerging Markets Index has shown stronger resilience compared to US-centric indices during similar economic cycles in the past.

Weakening US dollar

A weakening US dollar is anticipated as global risk sentiment improves and interest rate differentials narrow. A softer dollar could benefit US exporters while bolstering the appeal of international equities and commodities. Diversification into foreign assets may offer investors opportunities to capitalise on currency-driven gains. Historical patterns suggest that prolonged periods of dollar weakness have often coincided with stronger commodity prices, further enhancing the investment case for sectors like energy and mining.

South Africa is expected to sustain its recent momentum, overcoming structural challenges with notable progress across multiple sectors. Key developments include improvements in governance, financial regulation, and tax policy.

In December 2024, Moody’s affirmed South Africa’s long-term foreign and local currency debt ratings at ‘Ba2’ and maintained a stable outlook. This reflects SA’s credit strengths and underscores the importance of continued structural reforms to address challenges such as structural constraints on economic growth and a relatively high and costly debt.

In line with these positive reforms, the country’s bond market, represented by the FTSE/JSE All Bond Index (ALBI), continues to perform strongly, with a current yield of 10.80%. This yield suggests the potential for stable income, shielding investors from another volatile year and enhancing South Africa’s attractiveness to foreign investors. Improved ratings would likely lead to lower bond yields, making South Africa’s bonds even more attractive and reducing the government’s borrowing costs.

Efforts to exit grey-listing likely to succeed

South Africa’s commitment to enhancing financial regulations and aligning with international standards positions it to exit the grey list ahead of schedule. This milestone would reduce barriers to foreign investment and improve market confidence. Comparisons to other nations that have successfully exited grey-listing suggest a significant boost to both foreign direct investment (FDI) and portfolio inflows.

Reduced contentious reform concerns

Robust reforms addressing contentious tax policies are likely to create a more predictable environment for businesses and individuals, fostering economic stability. This aligns with global trends where tax has been a critical driver of cross-border investments. As investor sentiment strengthens with positive structural reforms, bond yields like those seen in the ALBI, which has delivered impressive returns, further indicate that South Africa is heading toward a more stable and profitable investment environment. The country’s ability to maintain solid bond market performance, despite both domestic and global volatility, provides confidence that the fiscal reforms and policy adjustments are creating a more conducive environment for long-term economic growth.

The combined effect of improved governance, regulatory reforms, and enhanced credit ratings will likely make South Africa an even more attractive investment destination, reinforcing the country’s economic stability and growth prospects.

US growth is expected to slow, reflecting the lasting impact of earlier interest rate hikes and tighter credit conditions, but a recession could be avoided. With higher borrowing costs and a reduction in fiscal stimulus, consumer spending - a major driver of economic growth - is likely to soften as household budgets feel the strain. This could particularly affect sectors reliant on discretionary spending.

Continued investments in clean energy, supported by government policies and private sector growth, are set to drive expansion in these areas.

The Federal Reserve’s monetary policy will play a critical role in shaping market dynamics. If the Fed manages inflation effectively and keeps rates stable or slightly lower, it could provide a more favourable environment for risk assets, supporting growth in the S&P 500. However, the potential for volatility remains, particularly if inflationary pressures or geopolitical uncertainties arise.

The market may experience occasional corrections, but long-term growth could remain robust, especially for industries focused on innovation and sustainability.

China's mixed prospects

China’s economy presents mixed prospects for the remainder of 2025. Sectors such as technology, green energy, and manufacturing are poised for robust growth, supported by strong government incentives and a global shift toward sustainability. The government’s focus on innovation, coupled with international demand for clean energy solutions, positions China as a key player in industries like electric vehicles, solar power, and AI development. However, the economy also faces persistent challenges, particularly in the real estate market, which has been struggling with oversupply, high debt levels, and declining property values. These issues, combined with an ageing population and a shrinking workforce, could place substantial pressure on economic growth.

Additionally, China’s demographic constraints, including a low birth rate and an ageing society, could lead to a labour shortage, further exacerbating long-term economic stagnation.

Geopolitical tensions, particularly with the US and other Western nations, could also dampen investor confidence, affecting trade dynamics and foreign direct investment. Comparisons to Japan’s “lost decade” serve as a cautionary reminder of the risks of prolonged economic stagnation, highlighting the importance of addressing structural inefficiencies, such as the overreliance on state-owned enterprises and an underdeveloped consumer-driven economy. If these challenges aren’t managed effectively, China could face a period of slower growth and increased economic instability

Europe recovery is expected.

Europe’s economic recovery is expected to progress at a cautious pace, supported by improvements in energy security and targeted fiscal support. The region is increasingly focusing on renewable energy sources to reduce dependency on imports and mitigate energy price volatility. This shift towards cleaner energy, along with initiatives like the EU Green Deal, is set to drive long-term growth, particularly in sustainability-focused sectors such as clean tech, energy infrastructure, and green manufacturing.

However, Europe’s recovery faces several challenges, including high debt levels across member states and ongoing geopolitical uncertainties, such as the war in Ukraine and tensions with Russia. These issues may limit the region’s economic potential and slow the pace of recovery. Additionally, Europe’s ageing population and rigid labour markets could further constrain growth. Nevertheless, the EU’s Green Deal and other sustainability investments are expected to act as a crucial counterbalance, fostering new industries and job creation, while also helping the region achieve its climate goals.

Adriaan Pask is the chief investment officer at PSG Wealth.

*** The views expressed here do not necessarily represent those of Independent Media or IOL

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