Navigating policy shocks, debt risk and shifting global power
The global investment landscape continues to shift under the weight of escalating geopolitical tensions, an increasingly inward-looking U.S. foreign policy, and unsustainable debt accumulation in the U.S. While U.S. markets remain supported in the near term by a weaker dollar and softer energy prices, risks are rising. In contrast, South African assets, though not immune to global headwinds, offer relative value and some insulation amid higher global volatility.
U.S. foreign policy is negative for global growth and equity risk premia
The United States is increasingly inward-focused and no longer acting as the primary guarantor of the rules-based international order that has broadly prevailed since the Second World War. This shift towards a more multipolar world is likely to embolden other powerful countries to pursue their own interests, potentially at the expense of global stability. This rise in political and economic risk does not appear to be reflected in current market valuations.
Aside from the heightened risk of global conflict, countries will also need to allocate greater resources to their own defence, as evidenced by NATO members’ renewed commitment to significantly higher military spending. Much of this expenditure, although increasing GDP, is unlikely to be as economically beneficial as investment directed towards more productive avenues.
Furthermore, much of the United States’ inward focus appears to yield limited benefits. Defence spending has not been reduced, savings from cuts to foreign aid in areas such as food and health initiatives are minimal, and reputable economists have extensively demonstrated the adverse economic consequences of broad-based tariffs.
In contrast to these external policy shifts, several domestic policies under the current administration are also negative for long-term economic growth. Political attacks on what has historically been a relatively well-functioning and independent judicial system risk undermining institutional credibility and the rule of law, which are essential foundations for economic confidence and investment. Additionally, a non-evidence-based approach to aspects of health care policy, including politicisation of public health decisions, reduces the effectiveness and efficiency of health outcomes and spending.
U.S. current debt path is unsustainable
The U.S. federal debt held by the public at the end of June 2025 stands at approximately $36 trillion or 123% of the country’s GDP, having more than doubled since 2000.
Trump’s Big Beautiful Bill is estimated to add a further $3 trillion to national debt over the next decade. On the surface, the bill provides a short-term boost to consumption, employment, and industrial activity, particularly in sectors tied to domestic construction, energy, and defence. However, the legislation will reduce tax receipts more than spending cuts, while diluted tariffs will fail to generate sufficient revenue to offset tax cuts. Concerningly, the next decade is likely to be far costlier than the last one, which was helped by ultra-low interest rates. Interest costs are now growing faster than any other budget category due to higher interest rates and debt accumulation.
Elevated debt levels limit fiscal flexibility and may raise borrowing costs if investor confidence wanes. While determining the threshold that bond markets deem an acceptable debt level remains extremely difficult, many market participants remain relatively unconcerned. This is likely due to the fact that concerns over rising U.S. debt have persisted for many years without triggering meaningful market dislocations.
At present, the debt burden appears manageable, largely because bond yields remain below the rate of GDP growth. However, if bond yields begin to rise above the pace of economic expansion, potentially triggered by investor concerns about overspending, the government could be forced into a painful fiscal consolidation involving significant tax hikes and spending cuts. Such measures would likely be negative for both GDP growth and broader U.S. market performance.
Whilst there is no viable alternative to the U.S. Dollar as the world’s reserve currency, we expect the dollar’s overvaluation, concerns regarding U.S. policy discussed above and the unsustainable fiscal deficits to continue weighing on it.
In the near term, the U.S. market will be supported by a weaker dollar and lower oil prices, which could provide some relief to growth and corporate margins. However, the tail risk of rising bond yields is growing, as is the risk of eventual fiscal consolidation and a commensurate growth slowdown.
U.S. slowdown is likely despite resilient hard data
Soft high-frequency data, which includes surveys like consumer confidence, business sentiment, and the Purchasing Managers’ Indices (PMIs), have highlighted broad-based weakness in U.S. economic sentiment.
On the other hand, hard economic data has remained relatively strong, with the unemployment rate remaining stable at 4.1%. Whilst other key metrics, such as payrolls and industrial production, show no signs of an imminent downturn, we have finally started to see signs of a slowdown in May consumer spending. Despite the above positive picture that the hard data paints, we expect the U.S. economy to slow into the back end of the year, as the hard data inevitably catches up with current soft data sentiment. In addition, Trump’s reciprocal tariff deadline of July 9th is fast approaching, and businesses still don’t know the size and scope of the tariffs they will face. This reduces their ability to operate and manage their supply chains. At a company level, U.S. corporate earnings outlooks have become increasingly opaque. Even if tariffs remain at current levels, businesses will still have to decide how much of the additional costs they can absorb in their margins and how much they will pass through to the end consumer. Despite the slowing economy, we expect the Fed to remain cautious about cutting rates without knowing the full impact of Trump’s ever-changing tariffs on inflation.
SA assets remain a safe harbour in a stormy global sea
In South Africa, GNU stability has been tested in the first half of 2025, impacting positive sentiment and the growth outlook. The coalition’s ability to manoeuvre through the inevitable challenges will determine whether it can sustain its momentum into 2026. For now, both investors and political analysts view the GNU as stable but fragile, capable of pushing reforms but requiring careful management of inter-party dynamics.
SA-focused companies’ earnings growth prospects have reduced in 2025 due to slower-than-expected economic reform and a fragile and slowing global growth backdrop. Despite the slower-than-anticipated growth, SA should still deliver a better GDP performance than it did last year, enabling many of the locally focused companies to grow their earnings, albeit at a slower-than-expected rate.
Given South Africa’s lower growth outlook and slow pace of economic reform, fiscal consolidation remains critical in preventing an unsustainable buildup of debt to GDP. While Moody’s post-budget commentary reflected a marginally more optimistic view of South Africa’s fiscal trajectory, the agency continued to warn about the risks of weak growth, elevated social spending, a bloated public sector wage bill, and low levels of fixed investment.
Despite these structural challenges, select SA-focused companies’ valuations have improved on the back of their underperformance over the last six months and are starting to look attractive once again. From a fixed income perspective, the decline in nominal yields and narrowing of the spread between South African and U.S. bond yields, combined with the growing tail risks associated with higher long-term global interest rates, particularly in the U.S., reinforces the case for maintaining a low duration bias within our portfolios.
In summary, given the increasing levels of geopolitical risk globally and rapidly shifting economic policies toward self-preservation, we anticipate volatility to rise as the market gains greater clarity around the impact of these policy changes on company profits and long-term interest rates. Despite continued uncertainty, Truffle continues to find good opportunities in both globally and domestically focused companies with significant margins of safety. This means we can construct well-diversified portfolios that can withstand volatility and a range of different economic outcomes.
