As we enter the third quarter of 2025, markets have continued to hit new highs despite rising geopolitical risks. Investors are confident that strong fiscal and monetary policy support will prevail, but market challenges remain significant.

Global tailwinds

Global headwinds

While the Fed’s asymmetrical intervention supports real assets, risks such as tariffs and immigration policy changes pose stronger growth headwinds than are currently priced in. We remain watchful for inflation developments.

While it is always difficult to predict policy proclamations and their timing, particularly from National Treasury, the South African Reserve Bank (SARB) seems likely to get its narrower inflation target band. The current inflation-target regime was introduced some 20 years ago when the late Tito Mboweni was SARB governor. The range was set at 3–6% then and has remained South Africa’s price anchor ever since. In 2003, Mboweni announced his intention to narrow the range to 3–5%, but rand and price volatility meant that then Minister of Finance Trevor Manuel held it at the more forgiving 3–6% range.

Some 20 years later, the SARB is again ramping up pressure for a narrower inflation-target range. This time, however, the range is appreciably stricter: proposing a point target estimate of 3%, the SARB governor noted that the current range is “now rather dated, reducing our competitiveness and opportunity” and hinders a of the currency. This proposal is not only lower than the current range midpoint but is much stricter in that it enforces a single price growth estimate for anchoring inflationary expectations. This would be much harder to achieve!

Part of the SARB’s reasoning is that we have drifted away from price discipline relative to other emerging markets. In the previous two-decade period of global low inflation, most emerging markets with inflation-targeting regimes reported narrower and lower ranges (see chart). Mexico’s range is now 2–4%, as is that of Chile, Colombia, Philippines and Hungary. Peru is much stricter, with a 1–3% range, while Brazil, despite having a range as wide as South Africa’s, is lower at 1.5–4.5%. The case for a lower range or point estimate is thus compelling purely on the basis of country comparisons.

As the proposed target is stricter, we should consider how well we performed with the wider target. The evidence here is less persuasive than I expected! The data show that while, on average, we stayed within the range, our mean and median inflation rate over the 2000–2024 period were 5.5% and 5.3% respectively – just squeaking into the upper end of the range. However, these data do not capture the decline in price volatility in the post-2000 period, which caused the standard deviation of inflation over this period to drop significantly. This is key to an inflation-targeting regime, as it shows that households’ and firms’ expectations around inflation have become “anchored” around a narrower range. The 3% proposal is ultimately an attempt to shift economic actors’ expectations around prices down to this new, much lower level.

The most obvious explanation for this incessant push for a lower inflation target is that lower prices or less inflation are better for households and firms. Inflation intrinsically means that the price of goods and services increase unpredictably over time, causing poorer households to suffer, as their disposable income effectively declines over time across a range of goods and critical services. Likewise, firms with rising input costs are domestically and globally less competitive (through an appreciating currency) and may induce extreme cost-cutting measures that affect their growth prospects. So-called “menu costs” or indexed costs such as wage adjustments, annual service price increases (such as insurance premiums or retirement annuity contributions) all rise and accumulate over time as prices embed themselves in the economy. And so the spiral of higher prices and lower growth, reduced consumption and investment begins. Stable low inflation is regarded as one of the magic ingredients for an improved economic growth outlook – the SARB model, for example, shows GDP growth rising by 0.25% after five years and around 0.4% after a decade with a 3% target. Likewise, consumption and investment growth are projected to increase by between 0.5 and 0.67 percentage points after a decade.

However, a lower inflation rate offers significant fiscal advantages – particularly compelling given South Africa’s current high levels of debt-to-GDP ratios and exorbitant debt servicing costs. Lenders (mainly domestic banks) demand a real return plus compensation for expected inflation: if inflation expectations fall, the nominal interest rate on new bonds and roll-overs also falls, and government would thus pay less on its current and outstanding debt. A lower inflation risk premium is also built into long-dated bond premiums (although country risk and fiscal risk may remain). Furthermore, should these lower debt servicing costs be coupled with higher GDP growth, the pressure on the fiscus will be reduced as growth exceeds debt servicing costs. These results are consistent with the SARB model and are highly compelling.

Given all these advantages, why have we not moved sooner to the 3% target? Firstly, there are significant negative short-term costs to be aware of: the SARB itself models a reduction in GDP growth of 0.3 percentage points. Coupled with looming tariff threats from the USA, our already anaemic growth rates could halve in the short term. Lower growth would bring with it an elevation of all the fiscal constraints the government already faces – from rising fiscal deficits (as revenue dries up), a worsening debt-to-GDP profile to concomitant negative effects on long-term bond yields. So the transition costs are not insignificant and could last longer than the one year modelled by the SARB; it is also not a sure bet that policymakers and politicians will support the short term socioeconomic costs.

Assuming the 3% target would be phased in over a few years, the greatest risk may be over the medium term from fiscal policy demands, price setters in the economy and the target itself. In attempting to maintain its fiscal commitments, government may simply ignore the 3% commitment (or kick it down the road a few years) to maintain fiscal spending.

Wage demands may also not willingly bend to the 3% target as unions pressure for now-standard above-5% increases. In such a scenario, fiscal and monetary policy credibility could be at serious risk and the 3% target in danger of not being achieved.

Perhaps the SARB should be more modest in its price-fighting goal; if we were not able to narrow the range during the most stable macroenvironment, under President Mbeki, what are our chances now? One option is for the SARB to consider a narrower range of 2–4% or even a more accommodating 1.5–4.5% (a la Brazil). Losing domestic and global credibility in both fiscal and monetary policy could be worse than not narrowing the interest target band.

Emerging markets and tech once again dominated the top five on the back of the weaker dollar, stronger commodity prices and record-beating results from the likes of Microsoft and Alphabet (Google). China, broad EMs, SA property, global equity and the 4th Industrial Revolution Fund are all in the top five for the month. The 4th Industrial Revolution Fund is a thematic fund that invests in global companies optimally positioned to benefit from new technologies and innovations across a broad range of sectors.

1-month absolute performance as at 31 July

The FANG fund has climbed to the top position over the past 12 months, with emerging markets breaking into the top five at number four. Both FANG funds remain in the top five as AI continues to propel valuations (Microsoft is now a $4 trillion company), while South African property holds the final spot on the back of another rate cut from the SA Reserve Bank.

12-month absolute performance as at 31 July

Exceptional US productivity growth, AI leadership, strong fiscal support, strong corporate investment and strong foreign capital inflows are driving a resilient economy, but structural and cyclical pressures are weighing increasingly on the greenback.

Structural headwinds to dollar strength

Short-term outlook: A bounce is likely

The dollar is currently oversold on technical indicators. Positioning is extreme, with speculators building significant net short positions. Hedge costs will remain high until the Fed starts to cut, suggesting that while the medium-term trend is down, we may see some consolidation or bounce in the near term.

China’s economy grew by a stronger-than-expected 5.2% year-on year in the second quarter of 2025. Export performance remains robust, and the industrial sector continues to show resilience. However, the consumer sector is still soft and the property downturn has persisted. As front-loaded shipments fade, export momentum may also slow in the second half of the year.

One bright spot is the global copper market: despite copper-intensive EV demand slowing, the US is projected to add over 1 million metric tons of copper demand annually by 2030, more than twice the refined-copper deficit in 2024 – largely driven by the rapid buildout of AI-focussed data centres. While this demand has supported the copper price this year, it did fall 20% at the end of the month after President Trump excluded copper from US import tariffs, underscoring the market’s sensitivity to tariff headlines. However, the US accounts for just 6% of global copper demand, compared to China’s 60%, which should limit the global impact of US trade policy.

Despite strong real growth, deflation remains a major headwind. Headline inflation has hovered near zero for four years, while producer prices have continued to contract, marking the longest deflationary stretch in China’s post-reform era. Consumer sentiment remains cautious, with household savings intentions at a decade high. In response, the Central Financial and Economic Affairs Commission – chaired by President Xi Jinping – called for the regulation of “disorderly low-price competition”. Stimulating domestic consumption is now essential to sustaining growth, and more targeted policy support is expected.

Trade volumes are falling in the second half of 2025, US immigration policies have tightened and economic uncertainty is rising. Company earnings remain well below their mid-2024 peaks, and ISM surveys indicate a challenging combination of higher inflation and lower employment. Markets do not seem to have priced in any costs of tariffs despite these pressures (see chart). This is surprising, as two-year inflation swaps have risen above 3%, a warning that inflation expectations may have become unanchored. This would be a big concern for a Fed that was not being pressured from the top.

Driven by the Fed put, however, investors appear more focused on inflation risks than slowing growth.

The combination of expansive fiscal stimulus and expectations of looser monetary policy supports risk assets. As a result, investors are fleeing the dollar, cash and bonds on fears that rising inflation will erode money’s value. This shift in investor sentiment has pressured the dollar lower and benefitted the euro and emerging market currencies. Consequently, there is strong demand for real assets such as gold, bitcoin and equities, which has driven these asset prices higher. We continue to favour emerging markets and remain overweight real assets, while maintaining a cautious stance that is dependent on upcoming tariff policy decisions.

We are not fighting the Fed for now, but we are watching for two key risks: tight immigration policies that could slow US growth and an inflation spike that could shake up asset prices later this year.