As political tectonics shift globally and domestically, investors are once again turning to fixed income to shelter their portfolios from volatility. With a second Donald Trump presidency now a reality and South Africa’s government of national unity (GNU) entering uncharted waters, the ability to extract real returns with reduced risk has never been more prized.
Fixed income, long the port of call in uncertain times, delivered a standout performance in 2024. South African bonds returned a remarkable 17.2%, outperforming equities (15.2%) and cash (8.4%). This reflects not only the asset class’s defensive properties, but also a repricing of risk in the wake of unexpected political stability.
The formation of the GNU after South Africa’s May 2024 elections was, in many respects, a masterstroke, defusing short-term uncertainty and enabling a stronger macroeconomic footing. That said, fissures remain.
At the same time, global markets are contending with the early tremors of Trump 2.0. His “America first” push and proposed suite of tariffs, domestic spending cuts, and corporate tax reductions are unnerving investors and complicating the inflation outlook.
In such an environment, real returns – and where to find them – matter more than ever.
A year for scenario planning
At Sanlam Investments, our chief economist, Arthur Kamp, mapped out three plausible paths at the beginning of the year: a base case scenario, a “trade war lite” scenario, and a worst-case trade war scenario. It seems we are settling somewhere between the lite and worst-case scenario.
Under this scenario, global GDP will be marked lower, US interest rates will remain elevated at 3.5%, and South Africa’s inflation will end the year at about 5%. This would allow for modest monetary easing locally, with our repo rate expected to decline to 7.25%, and the rand potentially firming against the weakening US dollar. Domestic GDP could tick up to 1.7%, from just 0.6% in 2024.
However, if protectionism escalates to the worst-case scenario, global GDP could slump while inflation accelerates. South Africa would not be spared.
Our current positioning assumes a middle ground, but risks are clearly skewed to the downside, especially if inflation surprises to the upside in developed markets.
Inflation in South Africa has moderated from earlier forecasts. We expect it to average 3.7% in 2025 with the South African Reserve Bank (SARB) forecast now at 3.6%.
Bond markets offer clarity in a foggy outlook
Inflation and interest rate expectations are critical for fixed-income portfolio managers in determining bond valuations.
So far, this year has seen South African bond prices swing aggressively as investors reprice global rate expectations. However, unlike in past cycles, local bonds were briefly de-correlated from their US, UK, and German counterparts – largely thanks to reduced political risk following the GNU agreement.
South African government bonds continue to offer compelling value relative to developed and many emerging markets. The 10-year bond currently yields 10.6%, compared to 4.2% in the US.
Adjusting for inflation and sovereign credit risk, our fair value model suggests that while bonds remain attractive, valuations are beginning to look stretched. Investors should tread carefully, particularly on the long end of the curve.
Our preferred positioning remains within the 10-year sweet spot, where real yields remain elevated, and credit spreads are reasonably priced. While 2024’s double-digit returns are unlikely to be repeated, we still expect bonds to outperform cash slightly this year.
Don’t ignore cash – it’s quietly rewarding.
Investors chasing returns often overlook the defensive, inflation-beating merits of cash. But in today’s environment – where volatility is high and duration risk remains elevated – cash offers solid, real yields without uncertainty.
We expect cash returns to land between 7.5% and 8% in 2025, implying a yield after inflation of 3.5% to 4.5% – well above the long-run average.
This “stunning” return profile – particularly when adjusted for risk – makes cash an essential component of a diversified portfolio. And for those wary of inflation’s resurgence, it’s a safe haven that pays.
Interest rates: one cut at home, postponements abroad
The US Federal Reserve is likely to ease rates in the next few meetings, with no more than three 25-basis-point reductions expected for the full year. That forecast, however, is highly dependent on how Trump’s economic agenda affects US inflation.
Locally, our base case assumes one final rate cut in this cycle, bringing the repo rate from 7.5% to 7.25% The data supported a rate cut at the March monetary policy committee meeting, however, the SARB has adopted a more cautious approach. Further cuts could come if inflation moderates and global volatility abates – but from a fixed-income perspective, a prolonged high-rate environment supports stronger running yields and better real returns.
Navigating uncertainty with discipline
As investors grapple with geopolitical uncertainty, shifting inflation dynamics, and monetary policy inflexion points, fixed income offers real opportunities. However, within the asset class, selection is key. Duration, inflation expectations, and fair value modelling should guide portfolio construction.
The coming months will test our assumptions. Will Trump’s policies accelerate global inflation? Can the GNU in South Africa withstand internal pressures? Will bonds continue to deliver outsized real returns, or is it time to shift towards shorter-duration instruments?
The resilience of both markets and policymakers will be tested in 2025. For investors, the challenge lies not in predicting every twist in geopolitics or central bank policy, but in staying disciplined and data driven.
Fixed income, in its many forms, still offers rare clarity amid uncertainty – particularly when guided by real returns and risk-adjusted value. In a world where volatility may be the only constant, bonds and cash remain essential tools for navigating the path ahead.
James Turp is head of investment strategy and a fixed-income portfolio manager at Sanlam Investments. He has more than 30 years of experience in active investment management and portfolio trading.
Sign up to Currency’s weekly newsletters to receive your own bulletin of weekday news and weekend treats. Register here.
