#BizTrends2025: US deregulation under Trump serves as a boon for equities, a bane for climate change

Source: ChatGPT

And just as investors went into 2024 relatively optimistic that several interest rate cuts were on the cards, today there is market optimism that deregulation and corporate tax cuts will provide a boost especially to US equities.

While the 2024 interest rate cuts came later and less substantial than expected (the first cut was in September 2024, and the United States (US) did not cut by more than 1% for the entire year) they nevertheless gave breathing room for other economies to ease their rates. According to the Bank of International Settlements over 75% of central banks, including our own, eased monetary policy in the past six months.

Consequently, in late 2023, post the dovish pivot for the US Federal Reserve, it was a relatively straightforward tactical asset allocation decision for PPS Multi-Managers to close its global equity underweight, and cautiously increase its exposure to South African equities into the 2024 calendar year to an overweight post the announcement of the government of national unity.

In contrast, the impact of Trump’s planned economic policies in 2025, while arguably positive for the US, is far more ambiguous for the rest of the world; with the threatened roll-back of its climate regulation likely to delay the transition to a greener economy; and stiffer tariffs on imports (to compensate for falling revenue from corporate tax cuts) likely to impact negatively on global trade too.

Climate regulation: The cost of inaction

According to the Network for Greening the Financial System (NGFS), the avoidable costs of climate change could amount to 9% of cumulative GDP to 2050, compared to the 2% cumulative cost of mitigating it. Consequently, pulling back from climate regulations could not only make catastrophic climate change much more likely, but also more expensive in the long run.

Similarly, while it is equally hard to gauge the eventual impact of Trump’s planned tariffs on the global economy, and how they will be implemented, global growth could be 0.8% lower in 2025 and 1.3% lower in 2026, based on modelling by the International Monetary Fund (IMF), and hurt US consumers too.

Markets have, however, largely ignored any potential negative long-term consequences, and quickly rated Trump’s victory as positive for the US equity market, and negative for US debt and non-US equities. While this trade might still have legs, the US equity market is already trading at elevated valuations, and unexpected negative news from the US (or positive news elsewhere) might upset the status quo.

In our own portfolios, we have not upweighted our allocation to global equities from neutral post the US election, but did rebalance our global small cap exposure back to target post a period of prior significant underperformance. Going into 2025 we are likely to maintain this neutral position and rely on our active international equity managers, especially those based in the US, to exploit available opportunities.

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We have also implemented selective exclusions in our largest global equity portfolio and will target a weighted carbon-intensity somewhat less than the benchmark. These changes, of course, are insufficient to prevent climate change, but will help us better manage the risk, and add a new dimension in how we can mandate certain managers going forward (we had not implemented exclusions before).

We have also persisted with our SA equities tactical overweight relative to our strategic asset allocation (in place since May 2024), preferring to play a potential SA economic recovery through this asset class rather than SA bonds, where we remain neutral. Given the relative valuation advantage for SA equities relative to global equities, and the success our appointed managers had in 2024, we hope to maintain this position for much of 2025.

Based on current valuations, the 10-year outlook for US equities is mediocre compared to global bonds, and while valuations are not a good short-term tactical signal, we have been moving to a global bond overweight relative to our strategic asset allocation. Should economic conditions fall short of market expectations, this asset class could be an important diversifier.

A diversified view on inclusion and impact

In our PPS Profit-Share Account, which we manage on behalf of PPS members, close to 10% is now invested in SA hedge funds, and we are adding selectively to private equity too to drive impact especially in education. These investments provide different sources of returns for our investors and partly protect them from periods where equity markets underperform.

We are backing our manager research process by appointing several partnership strategies in 2025 where we can back a manager’s unique skillset in a distinct mandate. Several of these strategies will be deployed into our post-retirement solutions which we are looking to launch in the first half of next year. These solutions are specifically tailored to our professional membership base and the longevity risk they experience.

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We are also engaging with our appointed asset managers, especially those based in South Africa, to better understand their approach to inclusion, transformation and climate risk, and to collaborate on impact. In doing so, we are deepening our awareness of each underlying manager's attributes, to better construct solutions aligned to our members’ preferences, especially our younger cohorts.

In short, our multi-manager investment process continues to evolve to meet our members’ needs, and the challenges of the current environment. We are also blessed to have appointed active asset managers highly skilled at exploiting available opportunities, and benefiting from periods of market dislocation, which 2025 will no doubt throw up for investors.

2025, like all years before it, threatens to surprise and challenge us in unexpected ways. As always, our investment approach attempts to be approximately right rather than precisely wrong and carefully manages the trade-off between risk and opportunity.