Trump policies and energy reform to dominate 2025 markets

Source: Reuters.

This is according to Old Mutual Investment Group (OMIG), which has highlighted that Trump administration policy implementation will be the most critical issue to watch in 2025.

Next year will be a critical period for local energy reform, with the energy crisis far from over.

Future inflation outlook

OMIG portfolio manager, Jason Swartz underlined incoming president Donald Trump’s widely publicised plans for increased global trade tariffs as a rising risk for both local and global markets. “The inflation outlook is likely to worsen on this basis, causing a review in the Fed’s rate-cutting cycle, given that they are unlikely to cut rates as much as previously expected as a consequence,” he explains.

“While deregulation and tax cuts will be positive for US equities, a trade-war escalation is not priced in, and is likely to ultimately disrupt supply chains and impact global growth negatively,” he adds.

Swartz believes that emerging markets will face headwinds in 2025 in this environment unless the dollar rally moderates and commodity prices recover. “However, South Africa is a haven among emerging markets, given our cyclical and secular growth drivers,” he points out.

When it comes to Operation Vulindlela, he believes that significant progress is being made which supports the case for the SA macro-outlook. “Key tailwinds for the programme include a focus on depth, rather than breadth of reform, as well as political buy-in and collaboration between relevant stakeholders.

“Noteworthy successes of Operation Vulindlela include the restructuring of Eskom and opening up of the entity for private investment in electricity generation, logistics reform around the rail system to allow private rail operators to access the freight rail network and operating ports,” he adds.

“Water is also seeing tentative improvement in quality monitoring systems and the turnaround of the water-use license system, while visa and digital communication reform are also seeing progress.

In addition, local cyclical and secular growth drivers will be largely shaped by the future of South Africa’s energy sector, which over the past 16 years has been dominated by escalating load shedding. The country is now embarking on a path toward market deregulation, with the Energy Regulation Amendment Act of 2024 leading the charge.

Energy crisis ongoing

OMIG head of responsible investment research, Tana Mongwe says that despite over 200 consecutive days without load shedding, the energy crisis that has plagued the country for almost two decades, is certainly not over.

“Through the Wholesale Market Code, due in 2026, this reform programme is set to reshape the energy market and presents both risks and opportunities for the future of energy in South Africa,” she explains.

“As we move into 2025, there is potential to create a more dynamic, sustainable, and inclusive energy market; however, reform must be handled with care to ensure that Eskom’s transition and the broader energy market changes do not undermine energy security or exacerbate existing inequalities.”

Mongwe highlights that Eskom is too big to fail without causing substantial damage to the country’s energy security and social fabric.

Market deregulation unpacked

“Market deregulation is therefore essential for SA to secure clean low-cost energy, particularly through the unbundling of Eskom’s generation, transmission, and distribution arms, which will allow greater competition, innovation, and private-sector participation in the energy sector,” she says.

However, fully incorporating Eskom into a free-market system would carry unacceptable social risks and costs, she adds. “While deregulation is necessary, Eskom's strategic role in the market must be preserved,” she warns.

“The National Energy Regulator of South Africa (Nersa) plays a critical role in ensuring Eskom’s survival. Without Nersa's support, Eskom may face collapse or require a substantial bailout. The regulatory framework will need to adapt to avoid the need for drastic tariff increases.”

Mongwe points to the rise of competition in the distribution sector, particularly from private players, posing risks for both Eskom and municipalities. It will be essential to manage this transition carefully to prevent widespread disruptions, she adds.

Regarding the longer-term path ahead, Mongwe believes that, following the unbundling process, Eskom Generation should be run as a non-profit organisation (NPO) supported by the National Treasury to ensure its financial sustainability.

“As private energy generation ramps up, Eskom should begin decommissioning its aging power plants, making room for cleaner, more efficient technologies,” she says. “It is also crucial that tariffs for Eskom Generation and Distribution are unbundled, allowing for greater transparency and competition in pricing.”

For reforms to succeed over the long term, regulators must prioritise enabling of existing frameworks, rather than focusing exclusively on new policies, while new institutions should have sound governance structures in place from the outset.

Against the current market backdrop, Swartz is looking at diversifying away from dollar defensives via German bunds or Japanese Yen given relative inflation and growth dynamics between US and the rest of the world.

The Old Mutual Balanced fund currently remains overweight in SA assets, but is employing currency hedges to manage global exposure, and US equity call options to mitigate a Trump-led US rally.