This year has certainly thrown the markets a few curve balls. While things looked buoyant in January, by April when United States (US) President, Donald Trump, announced his first round of tariffs the mood had changed, and markets were anticipating a recession to unfold globally. Now, as 2025 draws to a close, the likelihood for a recession has receded, although an orderly global slowdown is still on the cards.
It is Citadel’s job to filter through the noise on behalf of our clients, both to identify what the real risks are and to establish how to leverage the available opportunities. Our 2025 Raging Bull award for South African Manager of the Year, an accolade of which we are extremely proud, is testament to Citadel’s expertise in this regard. The award does not only reflect our performance, there are asset managers that perform similarly to us, but rather that we are able to reach this performance level with lower levels of risk.
In the current global economic environment, while the markets will definitely provide a return, a good asset manager will be the one who avoids downside risk. We do this by adhering firmly to the Citadel investment philosophy.
Citadel investment philosophy
The four pillars of Citadel’s investment strategy:
- The future is uncertain and will surprise.
- Valuations matter.
- Diversification is important.
- Focus on a financial plan that works for you and the resulting asset allocation.
The first pillar states that the future will surprise. Yet, we must be clear: this does not only refer to negative surprises, but also those on the positive end of the scale. And this year talks to that. Sentiment may be low, but the reality is that all markets surprised to the upside. Just think about the Johannesburg Stock Exchange (JSE), the rand and gold as an example.
Which leads us to the next pillar, namely, whether current valuations make sense, given the outlook for the world. We must remember that while it is easy to attribute a number to growth, the markets put a price on the future, whether that is based on expected earnings growth or hope. So, it is our job to determine whether or not such a price is fair given our assessment of the future.
In an uncertain environment, COVID taught us that being overly pessimistic in a very dynamic world is the wrong approach. Companies and countries can adjust rapidly to changes in the environment and revert back to solid growth faster than expected, bringing the world back on track. So, before we let negativity derail any investment strategies, we need to look at what is happening in the major global economies, as well as in our own.
United States – to hit a soft patch, but recession avoided
The US is coming off what has been an extremely healthy environment, with growth over the last few quarters sitting north of 3%. Second quarter US gross domestic product (GDP) growth surprised at 3.8%. The question is whether this is sustainable. At Citadel, we continue to view the US economy as being in a slowdown phase. However, the resilience of both equity markets and the US consumer has provided meaningful support during the first half of this year. Back in April, markets anticipated a recession following Trump’s announcement of sweeping trade tariffs. While we expect these tariffs to exert pressure on the economy over the next 12 months, our outlook remains that they will lead to a temporary soft patch rather than a full-blown recession.
While the US consumer is resilient, the US labour market has slowed sharply, especially in the third quarter. The conundrum for the US Federal Reserve (Fed), is that US inflation remains sticky, and will continue to move higher, given the impact of tariffs, but while the US unemployment rate remains steady, the economy is not creating the same number of new jobs compared to the last few years. If this trend continues unemployment will start rising soon. Given current inflation dynamics, the Fed would typically increase rates or, at the very least, keep them steady. However, with a cooldown in the jobs market, it also needs to be proactive by cutting rates in a hope of stimulating the economy.
It’s important to keep in mind that while the US economy remains resilient, much of this activity may reflect pre-emptive buying, by both consumers and businesses, aimed at building inventory ahead of the anticipated impact of tariffs. As a result, this momentum is likely to taper off as we enter the final quarter of 2025 and move into 2026.
We are already seeing the first signs of the impact of tariffs when we look at monthly US tax receipts from import duties. The revenue collected has increased from around $8 billion a month to $30 billion. Those figures are definitely supporting the US fiscus, but the cost will be passed onto business and the consumer.
At this point in time, US growth is being driven by consumer spending and capital expenditure. While the One Big Beautiful Bill may support the US economy through tax relief, this will mostly happen through the higher-income consumer. Capital expenditure in the AI and technology sectors has been accelerating, playing an increasingly important role in supporting economic growth. This investment surge is likely to cushion the economy as consumer spending comes under pressure. Given the United States’ strong economic competitiveness, it continues to attract substantial investment in these areas. For example, spending on the digital economy as a share of GDP has risen from approximately 3% in 2010 to around 5% today – a trend that shows no signs of reversing.
While the US economy is resilient, there are still headwinds that need to be addressed. US inflation remains above target and is likely to remain elevated as the impact of tariffs starts to bite. US growth is going to be far more reliant on high-income households and large technology firms. This raises concerns about the sustainability of growth in the absence of diverse participation.
In summary, a resilient US consumer, strong investment, and the fact that the likelihood of a recession has been replaced by the expectation of a soft economic patch means that the Citadel view remains relatively unchanged from April. We believe that while business and consumers will continue to support the US economy, it is going to slow to close to capacity growth in the short to medium term, as the economy slows from just over 3% growth to around 2% over the next few years.
Europe, including the UK – emerging from a growth slump
Across the Atlantic, economic activity is beginning to accelerate, gradually converging with US growth as the American economy slows. Like the US, this growth is partially being driven by a resilient consumer. However, European Union (EU) growth is also being boosted by increased fiscal spend, especially by the German government. This is being reflected in the German budget deficit, which has grown from 2.5% to now around 3% of GDP. As such, German bund yields have moved from offering negative interest rates to now yielding between 2.5% and 3%. While a lot of this spending will be used for defence projects, if there is no war, this will be a once-off spend and as such, will not be sustainable in the long term.
What is positive for the EU, is that its labour market remains resilient. While unemployment stands at around 6%, domestic demand and business investment is recovering. In addition, EU inflation is much less sticky than in the US, which is allowing the European Central Bank to be more accommodative in terms of its policy stance.
There are, however, concerns around the EU economy. Its industrial sector is under pressure, especially in Germany, given the high cost of energy, its lack of overall global competitiveness, and the tariff deal on all EU exports to the US. Adding to these headwinds, growth remains uneven amongst the different member states, which puts the EU’s recovery in question.
Despite these challenges, we do believe that Europe will keep recovering, and its growth will increase from about 1% for the next year, to about 1.3% on average over the next three years; still lower than the US.
The United Kingdom (UK), which is part of the broader European mix, is also picking up for similar reasons to the EU. Its labour market is showing resilience, and it is experiencing modest wage growth, However, unlike the EU, UK inflation is proving to be rather sticky, sitting at around 3.8% (higher than South Africa!). Its fiscal buffer is currently low, with tax hikes expected to be announced at the Chancellor of the Exchequer, Rachel Reeves’ budget speech on 26 November. Also, business investment into the UK remains weak, which is further fuelled by low productivity levels. As such, the UK has a similar growth outlook as the EU. We are expecting growth to average not much more than 1.5% per annum over the next three years.
China – supporting the consumer
Although not an official target anymore, China is still aiming for real economic growth of around 5% per annum, which has thus far this year been driven largely by manufacturing, investment spending and exports. However, the country is aiming for a more consumption-driven economic structure. To achieve this, China will need to provide much stronger explicit and targeted policy support to their consumers. This has started, but is still insufficient.
The combination of a prolonged property market slump, over-capacity and severely depressed consumer confidence has let to insufficient demand versus supply in the Chinese economy, with the inadvertent consequence of deflation being fairly entrenched in that economy currently. The export sector has been the one shining light this year, as China has benefited from a sharp increase in front-loaded demand.
While exports to the US have slumped this year amid the trade war, China did manage to diversify its export markets, with significant growth in Chinese exports to Africa, the ASEAN region, and to Europe this year. However, as the tariff pressure bites, and the positive impact of previous stimulus fades, we are likely to see the Chinese economy lose further momentum and, like the US, also experience a bit of a soft patch ahead.
In order to gain economic momentum and to kickstart spending, Chinese consumers need greater confidence in the stability of the economy, which relies on a stabilisation of the domestic property market, and more clarity and confidence for consumers around the job market and income growth.
The Chinese government does have a greater focus on supporting consumers. Chinese government bonds, which have traditionally been issued to support infrastructure projects, are now being diverted to also support public welfare projects. When it comes to subsidies and policy support (like fiscal spending and rate cuts) for consumers, the sectors receiving those subsidies are seeing much better growth than those without.
In this environment, our current assumption for China is that its growth will slow to about 4% per annum over the next couple of years unless further targeted stimulus is effectively implemented, soon. Anticipated economic growth of 4% per annum for China is more optimistic than the market’s view in April amid the Liberation Day tariff announcements. At the time, the expectation in markets was quite bleak, with an anticipated significant decline in Chinese economic activity. At Citadel, we did not support that view. While we did downwardly adjust our growth assumptions at the time, it was muted.
The global outlook – more resilient than expected in April
The world is becoming more resilient to global hiccoughs. In past editions of Citation, we have mentioned how trade amongst emerging market economies has increased from around 25% in the early 80s to close to 50% today, and that number is only set to increase. The percentage of Chinese exports to the US is dropping off; a trend that started around five years ago, as China started to diversify its supply chain, growing exports to Africa, emerging Asia, and Central America.
Additionally, American imports of Chinese goods have declined sharply. In 2024, US imports from China totalled around $40 billion, but that figure has dropped to under $20 billion in 2025 – a slowdown largely driven by the impact of tariffs. While Chinese imports have fallen, exports from Vietnam to the US have increased. However, this may reflect a degree of “smoke and mirrors,” with goods potentially being rerouted from China through Vietnam before reaching the US.
However, China is exporting a lot more to its BRICS partners. This makes global trade more sustainable and is probably a major reason that the impact of tariffs has been lower than expected. So, despite Trump’s tariffs, global trade has not slowed – if anything, it is increasing.
America is no longer the only game in town. The BRICS nations have enormous influence in the global economy. They make up almost 50% of the global population, they are responsible for a third of global GDP, and surprisingly, they make up 50% of global agricultural production, which is important given that the US is a net importer of food. This indicates that global trade channels are definitely going to change going forward.
Looking at the global economy, we’re seeing a diversification in trade, supported by other growth drivers such as increased investment in technology. The current environment appears more resilient than what was expected in April. While we remain cautiously optimistic rather than outright bullish, we believe the world is entering a phase of moderate growth – hovering around 2% to 2.5%. This pace is sufficient to support corporate earnings going forward.
South Africa – benefitting from global economy
South Africa, fortunately, is also benefitting from what is happening in the rest of the world. The current commodity run has definitely supported the JSE as the increased demand for commodities has seen the JSE repeatedly reach record highs this year, and, as a result, the rand is also at its strongest level in years.
The reason for the commodity run is multifaceted, but two triggers are the increased demand for platinum and gold. As the appetite for electric vehicles fades, partly due to Trump withdrawing subsidies for electric vehicles, the demand for platinum has been boosted as it is used in combustion-motor-vehicle exhaust systems. On the gold front, many central banks are diversifying away from the dollar into gold which has significantly increased demand for the precious metal. Unfortunately, this is a commodity cycle and it will not last forever. As such, South Africa needs to continue working on fixing its economic fundamentals.
The country’s fiscal resilience is looking better given the commodity cycle, as we see an increase in tax revenues off the back of mining, which is taking some pressure off the fiscus. In addition, Treasury and government are showing some discipline in terms of keeping the deficit intact. This has been reflected in the sharp decline in our long-term bond yields and the subsequent rally in the bond market.
Positives beyond the commodity cycle
Another encouraging development is South Africa’s second-quarter GDP performance, which likely marks the first time since the COVID-19 pandemic that we’ve seen a more diversified and broad-based contribution to growth – resulting in a print of over 3%. Manufacturing has returned to positive territory, and mining, buoyed by the commodity cycle, delivered a strong performance. Agriculture, while its contribution declined to 2.5%, remains in positive territory. Despite the recent uptick, both manufacturing and mining are still operating at levels last seen in 2008, underscoring the prolonged stagnation in these sectors.
Retail sales, which had remained flat since the pandemic, have shown a notable rebound, with growth reaching between 8% and 9%. This surge is partly attributed to the introduction of the two-pot retirement system, allowing savers to access a portion of their pension funds. Additionally, interest rate cuts have provided further support to consumers. We’ve now seen six consecutive quarters of positive private consumption, which continues to be a key driver of economic momentum.
In addition, South Africa’s governance structures are tightening up. There are more corruption cases being investigated which has contributed to South Africa being removed from the Financial Action Task Force’s grey list in October 2025. There are structural reforms taking place through Operation Vulindlela (a joint initiative of the Presidency and National Treasury to address structural issues in the business environment).
One of the biggest benefits for South Africa currently, however, is that the political landscape has opened up. With the Government of National Unity (GNU) in place, we do not have one party with an all-out majority. So while coalition governments are challenging, with no one party having the final say, we still have a more business-friendly government in play. In addition, the country and the constitution are still supported by the institutional strength of our judges and courts, and the tenets of free speech and a strong civil society voice. All of this underpins our democracy. It is important to ensure the GNU can work together more strongly to continue to create a business-friendly government that can implement the required reforms.
Progress in South Africa’s energy grid is also worth discussing. This is a case study of what can happen when private capital flows into a sector. Eskom’s load shedding is now at its lowest level since 2017, as private renewable energy investment has supported improvement.
The headwinds still remain
We must not lose sight of the lingering headwinds. In terms of economic growth, consumer confidence remains bleak, understandably so given the global challenges but also because of a lack of confidence in the economy, partly due to the absence of investment. I have discussed the importance of investment extensively in previous editions of Citation.
South Africa has again had a negative print for gross capital formation over the last quarter. One reason is that South Africa is over regulated and finds itself at the bottom of the International Monetary Funds’ table on business regulation, which relates to the ease of doing business. It is difficult to do business here.
If the South African economy is to grow, it is essential that the focus is on growing investment. Only then can we say that the fiscal challenges are behind us. We should get more insight into this at the Medium Term Budget Policy Statement on 12 November.
Right now, the economy needs to become more competitive and productive than its competitors.
A quick look at the impact of productivity (or the lack thereof)
Productivity is another serious issue South Africa has to deal with. In economic terms, a country’s potential growth is linked to the growth of the population and their productivity. This issue of productivity is why Citadel thinks that the US will remain ahead of the EU in terms of growth. It is because the US population is growing fast and is very productive and that productivity has been backed recently by AI and resulting investments into this space. The EU’s population, on the other hand, is shrinking and is not as productive.
The issue of productivity is interesting. Simply put, productivity is measured by dividing the amount of output (products or services or GDP) by the inputs (labour, capital or materials) used to generate that output. When we look at labour productivity (units of output divided by hours of labour) across a number of countries, China’s productivity is the highest, sitting at around 6%, which has supported its competitiveness, compared to the G20 average of around 2%. However, when you look at South Africa, it is sitting at -0,8%. Nigeria is at -1.1% and Argentina is the worst at -4.29%. This lack of productivity is bad news for South Africa because the country’s population is growing at about 1.5% and with negative labour productivity, the country will not be able to reach capacity growth of above 1%.
There are a number of factors that influence labour productivity. One issue that South Africa faces is the prohibitive nature of its labour laws. Another is education and the skills level of the labour force. Fixing these issues, however, will take years.
Given the country’s challenges around investment and productivity, we at Citadel are not convinced that the country’s growth is going to pick up significantly. We are still seeing growth of around 1%. Despite productivity issues, if government and policy reform improve, then growth may increase to 1.5% over the next three years.
Boxing clever to maximise opportunities while avoiding risk
When we look more closely at the economic fundamentals, while we cannot deny that we are in an environment where there is going to be softness globally over the next year, there are still a lot of opportunities for investors.
In this environment, it is important that we “box clever” and find the right opportunities, because not all companies will do well in this current economy. Our job is to find those that do, and to then find alternative investment opportunities that support or preserve wealth and, more importantly, to ensure we avoid any potential downside risk. This is when we turn to the third and fourth pillars of our investment strategy – asset allocations and diversification.
This year has shown us, again, how well Citadel’s investment strategy works. Indeed, despite all the uncertainty at the beginning of this year, a lot of noise from leaders like President Trump, and then the positive surprise from markets, we were able to participate without blowing our risk budget.
So as we head towards the festive season and then into 2026, Citadel’s strategy is clear. We will continue to look for the opportunities but, more importantly, to focus on managing risk for our clients, thereby securing their wealth.
