The role of private markets in the age of Trumponomics

By Navin Lala

2024 was the biggest election year in human history where over 70 countries representing more than half of the global population held elections. It is estimated that over 80% of incumbent parties lost voter support in 2024 compared to the previous election, making it a significant year for global democracy.

Economic challenges, especially inflation, and overall dissatisfaction with incumbent governments were key drivers behind voters' decisions to oust incumbents leading to key electoral outcomes such as the return of Donald Trump to the White House and here at home the ANC losing its majority for the first time since 1994.

One of the consequences of the elections anti-incumbent theme is that the world is now scattered with a host of newly installed governments seeking to change the status quo, with President Donald Trump being at the forefront of this sea of change.

Trump’s America First policy together with his drive towards greater deregulation was well received by corporate America at the start of the year boosting optimism around US growth and future corporate profits. After months of the talk or threat of tariffs, the Trump administration announced a 25% tariff on imports from Mexico and Canada, and the doubling of duties on Chinese goods to 20%, all effective as of 4 March. Launching new trade conflicts with the US’s top three trading partners, and freezing aid to Ukraine are significant events signalling a major shift in the global landscape.

Markets by nature are never certain, however the impulsivity of Trump where he is known to say one thing in the morning and say or tweet something completely different in the evening, makes it virtually impossible for investors to decipher between what is posturing and noise, and what will actually be implemented.

What is clear, is that the next four years are likely to be marked by a complex interplay of geopolitical tensions, economic uncertainty and heightened market volatility. This places investors in unchartered territory, and susceptible to large market swings, requiring more resilient portfolios that are able to weather the Trump storm while still being able to participate in the opportunities that may arise through the uncertainty.  

The traditional 60/40 type balanced portfolios have served well, relying on the historic relationship between stocks and bonds to achieve portfolio diversification. This is because historically, stocks and bonds tended to move in opposite directions, providing a hedge against each other. With the ongoing trend of rising correlations between stocks and bonds this historic relationship has changed making the traditional 60/40 portfolio less diversified as they could be.

Mark Twain said it best, “It isn't what you don't know that gets you in to trouble, it's the things that you know for sure… that just ain't so”, meaning that the real danger lies in believing something is true (i.e. well diversified) when in fact it isn’t anymore.

To solve for this, investors have been incorporating more alternative investments or private market investments to their portfolios, shifting towards a portfolio of 40% stocks, 30% bonds and 20%-30% in private markets. According to the Global Pension Assets Study 2024, allocation to alternative assets increased from 11.7% in 2003 to an estimated 20.1% at the end of 2023.

The key reasons for incorporating private market exposure with traditional funds (60/40) is that private market investments such as private equity, mezzanine debt, private debt, and infrastructure tend to behave differently than typical stocks and bonds allowing them to lower volatility, enhance returns and provide better diversification and improved portfolio resiliency.

A feature of private markets is that performance is driven by the economic performance and strength of the underlying assets rather than investment cycles and market sentiment as is the case in public markets, where swings in sentiment can cause unnecessary volatility and introduces unwarranted risk.

While there is optimism around US growth, the economic outlook for South Africa has also improved where a combination of structural and cyclical improvements has been underway to accelerate economic growth and further boost confidence. While there are still much needed reforms to place South Africa on a sustainable higher growth trajectory, there has been evidence of improvements.

Progress can be evidenced by the improvements in Eskom’s energy availability factor allowing for a more stable supply of electricity, as well as the higher Transnet volumes, both of which have been major boons to economic growth. Consumer finances have also been improving off the back of lower inflation, lower interest rates and better employment growth.

The improvements in the domestic operating environment, provides a favourable environment for private market investments, and provides investors with access to real economy exposure which complements their public market exposure.

While the world tries to learn the art of dealing with Trump, uncertainty is likely to prevail with higher market volatility, making private market exposure an important asset class in enhancing returns and improving overall portfolio resiliency.

Navin Lala is the client director at Old Mutual Alternative Investments.

BUSINESS REPORT