Fairtree Balanced Prescient Fund Q2 2025 commentary

Tariffs, Geopolitics, Wait and See

The fund returned 6.73% over Q2-2025 and 9.95% year to date. The fund outperformed its peer group over the quarter and remained within the top decile year to date.

Over 3 and 5 years, the fund continues to be ranked within the top 10% of its peer group. The fund aims to provide investors with significant positive real returns and has outperformed inflation by 5% or more over the last 12 months, 3 years, 5 years and since inception.

We anticipate continued macroeconomic uncertainty throughout 2025. Global investors remain cautious amid evolving geopolitical tensions and shifting trade policies. In the US, ongoing tariff measures and mixed policy signals have weighed on sentiment, prompting a more defensive approach. In Europe, the mood is tentatively positive, underpinned by fiscal spending and supportive monetary policy. In emerging markets such as China, local policy support, easing potential, a weaker US dollar, lower oil prices and innovation in key sectors are helping to stabilise outlooks, although global risks continue to act as a drag.

South African sentiment is more cautiously optimistic. While the stronger rand and safe haven inflows point to resilience supported by commodity demand, a new inflation target, lower yields and improved terms of trade. However, political uncertainty is dampening confidence. The SARB’s decision to cut the repo rate (25bps) reflects economic support. Market sentiment remains cautiously optimistic, though structural and political headwinds persist. Risks to growth have tilted to the downside.

Our portfolio is diversified, highly liquid, and built to navigate a range of macro scenarios. We maintain a defensive allocation in developed markets and a more opportunistic view in emerging markets. We are overweight in government bonds globally and locally, while holding an underweight in equities, particularly in the US. We continue to favour domestic assets. The portfolio is structured to withstand slowing growth, geopolitical uncertainty, and persistent inflation pressures. We are neutral on cash, pending clearer signs of a broader global slowdown. While overall positioned defensively, we hold targeted positions that stand to benefit from improving conditions in China and South Africa.

In this environment, active management and adaptability remain essential. Our strategy is anchored in robust top-down macro insights, supported by disciplined bottom-up research.

 Macro overview

The second quarter was marked by volatility, with markets shaken by renewed trade war concerns and direct conflict between Iran and Israel. Yet, despite the turbulence, financial markets held up well, risk assets generally moved higher, and several US Big Tech shares recovered from earlier lows. Emerging market equities and bonds also performed strongly.

The US economic data continued to slow in Q2 after GDP contracted by 0.5% in Q1 due to higher imports amid tariff concerns and weaker consumer spending. While employment remained resilient, consumer sentiment and household consumption softened. Inflation moderated, prompting several global rate cuts, while the Fed held steady as inflation remained sticky around 3% and the outlook uncertain. The Fed signalled a readiness for future rate cuts, highlighting downside risks to growth. Equity markets rallied strongly, hitting record highs by quarter-end, led by big tech and AI-related stocks, particularly the “Magnificent Seven,” which delivered double-digit returns. The Nasdaq outperformed, driven by names like Nvidia, while the S&P 500 and Dow also posted solid gains. Market performance was underpinned by strong Q1 earnings and renewed interest in growth stocks, as well as a shift to risk-on sentiment supported by easing inflation, improving trade talks, and expectations of policy support.

The US Treasury market saw a steepening yield curve in Q2, with long-term yields rising on fiscal concerns and short-term yields falling as softer data made the Fed more dovish. Fiscal concerns rose in May over rising debt, weak bond auctions, tax cuts, and after Moody’s downgraded the US credit rating. Yields fell again in June as some Fed members signalled support for rate cuts if inflation stayed low, though Chair Powell stuck to a cautious stance.

European sovereign bond yields fell in Q2, especially on shorter-dated bonds, driven by weaker growth expectations following US tariff threats and easing inflation. The ECB cut rates twice, bringing the main rate to 2.00%, while signalling the easing cycle may be nearing its end. Equities in the region gained, supported by the delay in US tariffs on EU imports, the ECB’s rate cuts, and a stronger euro. Germany showed signs of recovery, with the Ifo business climate index hitting a one-year high. Industrials and real estate led equity gains, while consumer discretionary, energy, and healthcare lagged.

Emerging market equities delivered strong returns in Q2. The performance was supported by improving trade sentiment, a weaker US dollar, lower oil prices and structural improvements in key regions. China rebounded from April lows as the US reached a trade truce with China. AI optimism and state support for the property sector also increased, though weak domestic data capped gains.

UK equities posted solid gains in Q2, with the FTSE 100 reaching a record high in June as markets stabilised following early-April tariff tensions and the UK struck a trade deal with the US. The Bank of England cut rates by 25bps to 4.25% in May, which, along with Governor Bailey’s call for closer EU ties, further boosted sentiment.

Commodities were the standout performers in Q2 2025. Gold briefly hit a record US$3,500/oz before ending the quarter up 6% at US$3,303, supported by geopolitical risk, central bank buying, and a weaker US dollar. The broader commodity complex performed well, and industrial metals like copper also gained before Trump announced a 50% tariff on copper imports. Oil fell 10% to US$67/barrel, with prices dragged down by oversupply concerns despite a temporary spike during the Middle East conflict.

South African equities ended Q2 in positive territory, led by a strong rebound in the resources sector, particularly platinum group metals and gold miners. Improved political stability and investor confidence supported a 1.62% appreciation in the rand to R17.71/USD. Bond yields declined across the curve, supported by a 25bps rate cut from the SARB and comments suggesting a new 3% inflation target could be announced soon. This shift in tone, alongside a more favourable inflation outlook, helped anchor expectations. Inflation remained subdued, with headline CPI at 2.8% and core inflation at 3.0%. While economic growth remains weak, with Q1 GDP rising just 0.1% q/q and 0.8% y/y, slow structural reforms and improved macro stability are bolstering medium-term prospects.

Government of National Unity (GNU) dominating headlines in Q2. After early disagreements over the National Budget, the GNU managed to pass a revised fiscal framework, seen as a positive signal by markets. Sentiment was further supported by President Ramaphosa’s trip to the US alongside DA leader John Steenhuisen, where they presented a united front in talks with President Trump. However, cracks in the coalition reappeared in June when Ramaphosa dismissed a senior DA cabinet member, prompting the DA to boycott the upcoming National Dialogue.

Market review

Global equity markets rebounded from Q1. Global equities rose 7.7%%, while ex-US equities outperformed with 12%. US equities rose 11% mostly led by the strong performance of the large consumer technology stocks. The equally weighted S&P500 was up 3.4% over the quarter, showing how concentrated the US equity rally is. Europe was up 2.5% and Emerging Markets up 12%. Within Emerging Markets, China 2% and South Africa outperformed 13.6%.

SA Equities (Capped SWIX) was up 9.7% over the quarter. SA industrials was the best performing sector, up 12% (with Naspers/Prosus and MTN performing the best within the index), and SA resources was up 9.8% predominantly driven by gold stocks (Anglogold Ashanti and Anglo America performing well) and PGM stocks (Valterra and BHP performing well). The rand appreciated around 3.5% over the quarter against the US dollar.

During the quarter, the South Africa All Bond index rose 5.9% and cash returned 1.9%. The Bloomberg Barclays Global Aggregate Bond Index gained 0.9% over the quarter.

Commodities were strong in general, with Palladium (11.7%), Gold (5.8%) and Platinum (36.2%) the strongest performers.

The US dollar weakened by 7% against the major currencies as policy uncertainty increased and the growth outlook weakened.

Portfolio performance

The Fund returned -0.3% over Q4 2024 and 13.4% over 2024. The Fund underperformed its peer group over the quarter but outperformed over the year.

The fund returned 6.73% over Q2-2025 and 9.95% year to date. The fund outperformed its peer group over the quarter and remained within the top decile year to date. This outperformance was primarily driven by the positive contribution from asset allocation, offsetting the negative contribution from security selection. Our security selection within SA Equity, Global and Emerging Market Equity detracted from excess returns, while security selection within Commodities and SA Property contributed to excess returns.

Our SA Equity exposure underperformed the FTSE/JSE Capped Shareholder Weighted (Capped SWIX) Index. Our overweight exposure to Gold Miners was the key performance contributor during the quarter, along with our overweight position in Prosus & Naspers. This was more than offset by negative contributions from our overweight positions in General Retail & Diversified Miners and underweight exposure towards PGM Miners and Global Defensive stocks like Richemont & British American Tobacco.

Within Global Equity, overweight exposure to Technology contributed, while overweight exposures to Consumer Discretionary and Financials detracted.

Within Commodities, our overweight in Gold and Platinum contributed to excess returns.  

Within asset allocation, our decisions to be overweight SA Equity and Emerging Market Equity and underweight Global Equity worked in our favour. Our overweight in Commodities also contributed, while being overweight in US Treasuries detracted.