Market noise: Risks, opportunities and long-term growth

Nothing seems to guarantee a sleepless night more than worry, especially when tinged with uncertainty, or a sense of possibility. Worry pulls in one direction and the possibility of change in another, ensuring our brains are so distracted analysing risks and possibilities that sleep becomes entirely elusive.

Most of the things we worry about never materialise, but several specific factors in the markets are currently generating noise and therefore caution among some investors. So, how do we navigate through all the noise this represents? And, acknowledging that markets and the economy are two very different things, what are the risks and opportunities in the middle of this noise?

Uncertainty caused by policy change

Tariffs, which President Donald Trump calls ‘beautiful’, are typically viewed with caution by markets. They present potential challenges for global economies, particularly to the rest of the world, but less so for the US.

The below graph shows a comparison of exported goods vs imported goods to the US.

Source: Bloomberg, Nedgroup Investments. Latest data as of 3 March 2025

The below graph shows that the tariffs currently proposed by the Trump administration would bring the levels in line with World War II levels.

Source: US ITC, Evercore ISI, AMP. Trump 2.0 assumes 10% general tariff and 50% on China.

However, President Trump appears to employ tariffs as a negotiation tool, initially taking a strong position before reigning back the tariff levels and seeking agreements. His other proposed policies, such as tax reductions and regulatory changes, are supportive of economic growth.

Geopolitical tensions

Some time ago, I attended a seminar in which it quickly became apparent that the room was divided in two. The opinions on each side could not have been more strongly held. Although it is tempting to summarise the division as ’the left’ and ‘the right’, it would be far more accurate to categorise it by saying ’those who are pro-Trump’ and ‘those who are against Trump’.

The mood in the seminar was not unique. It has long become apparent to me that the world has become increasingly polarised. Communication, which at a time like this should be paramount, is becoming impossible, not least because both sides appear to be reading radically different news. It is indeed possible that division lines might be drawn by country: Russia and the US in one corner, Europe and much of the rest of the world in another corner. But it is also clear that divisions within sovereign nations could lead to civil unrest.

The fear for markets is that the world will continue to wind back on international cooperation, with high barriers to trade and a growing sense of hate, disinformation and mistrust between participants.

Don’t misunderstand me, this is not a scenario devoid of growth. The graph below shows that the political colours in charge make little difference to growth, which true to its nature keeps growing.

Source: Bloomberg, Nedgroup Investments. S&P 500 performance. Latest data as of 16 August 2024. Note: Chart is using a log scale.

There is one conclusive take away: remain invested for the long-term if you can, regardless of who might be president. This becomes even more evident when we diversify globally. But it is a scenario in which winners and losers will be magnified, as opposed to growing together. This type of market requires strategic capital allocation based on careful analysis of policy changes, emerging alliances, valuations, economic fundamentals, and market sentiment – all approached with emotional discipline.

Conflict escalation

We are currently seeing numerous conflicts and tensions on the global stage, including Russia/Ukraine, China/Taiwan, and Israel (US)/Middle East. Despite the humanitarian devastation associated with conflict, markets have historically shown resilience during wartime periods, which can create potential entry points for investors.

Our role is to evaluate both the risks and the opportunities arising from any conflict escalation or resolution. For instance, we should assess how increased European defence spending, or a potential Ukraine peace agreement might affect markets. These factors contribute to Europe’s current undervaluation and potential attractiveness as an investment opportunity despite its proximity to conflict zones.

Inflation

Migrant deportation, tariffs, supply chain disruptions and other such policies all add fuel to the inflationary fire. But inflation, although sticky, appears to be under control, as demonstrated in the graph below.

Source: Bloomberg, Nedgroup Investments. Latest data as of 28 February 2025.

Markets anticipate that both the Federal Reserve and European Central Bank will continue reducing interest rates, enhancing the appeal of fixed income investments as their returns typically increase when rates fall.

Additionally, artificial intelligence might be deflationary and prove to be a significant propeller of growth.

Climate change

Climate change is a significant threat to long-term growth and prosperity. Instinctively, one could assume that the message “drill baby drill” is positive for fossil fuel producers. Indeed, many clients have asked us if we would be tempted to overweight energy given the message, but this is not actually the case. It represents a possible risk to share prices. Not only does increased production lower the price of fossil fuels (supply and demand), but it also creates competition by introducing new companies into the market, thus putting downward pressure on traditional energy companies’ share prices.

China is currently leading the charge on the energy transition front. This is not necessarily because it aligns with the country’s green credentials, it is because it makes sovereign and economic sense. Instead of incurring the costs of extraction, once the infrastructure is built, as the word implies, the energy keeps renewing itself. Of course, there are maintenance costs and disposal costs. This is also the case with traditional energy. But it is not only environmentally friendlier, it makes more economic sense, is cheaper to run, and allows the country to sever its dependence on fossil fuel producing nations.

The below clearly shows the rise of renewable energy consumption in the UK.

Source: UK grid https://www.energydashboard.co.uk/historical

And the gradual decline in fossil fuels.

Source: UK grid https://www.energydashboard.co.uk/historical

Headline equity valuations and the Magnificent Seven

When we exclude the Magnificent Seven (Apple, Nvidia, Microsoft, Amazon, Meta, Alphabet, and Tesla), valuations are far more reasonable. Data shows that all markets are fair to attractively priced once the high valuations of these companies are stripped out. In 2024, we shifted our US exposure to capture opportunities in smaller companies and protect risk by moving to an equally weighted S&P500.

What we can learn from the past

Market turbulence is something many of us have become quite accustomed to, and a normal part of investing. In fact, even though it can be prolonged and feel painful, turbulence is in fact usually a buying opportunity in disguise. The data below shows that only on two occasions following a severe market disruption were markets still underwater after a year. In none of these cases were markets still underwater after three years:

Source: JP Morgan Insights

The Nedbank Private Wealth approach

Navigating these uncertainties requires skill and a robust, repeatable process to assess risks and identify opportunities. We have built our process on careful analysis, to dispel the tensions between the risks and opportunities that could distract us or influence our thinking. Our antidote to insomnia includes a framework which encompasses all aspects impacting markets: economic fundamentals, geopolitics, valuations and sentiment, and ensures we make strategic decisions that align with your long-term investment goals.

Geopolitics, economies and markets are ever changing. This article highlights the situations at this current snapshot in time. Click here to read more about how we’re positioning our portfolios for long-term growth.

For more information, please get in touch, or speak to your private banker.

Key takeaways:

• President Trump is creating a lot of noise, but some of it is just that – noise.
• Tariffs are typically not positive for global trade, but the impact is greater away from the US and Trump has shown signs of pulling back from extreme rhetoric on tariffs.
• The political landscape continues to shift to the right globally, with increased pressure on government debt levels.
• The geopolitical outlook has pockets of concern, but this is nothing new. The chance of a resolution in Ukraine appears to have increased.
• Inflation is sticky but under control.
• Economic growth is evident, with room for central banks to continue cutting rates.
• Valuations matter in the long term and shouldn’t be ignored.
• We like risk and equities but are diversifying exposure to reflect valuations and global opportunities.
• Fixed income is a positive counter for portfolios, offering attractive yield and potential capital growth should interest rates fall.