| The podcast to this newsletter can be listened to here. Market and Economic Roundup Of course. Here are 5 key topics on the economy and markets for South Africa (RSA), the United States (USA), and the globe, specifically focused on the last week. South Africa * The South African Reserve Bank held interest rates steady at 7% as inflation edged higher, * The stock market index (SAALL) gained to a record high of 105,423 points on September 18, primarily supported by mining stocks. * The country still faces economic uncertainty due to the 30% tariff hike by the US, threatening exports and jobs, along with struggles in the automotive and poultry sectors. Interestingly, Lesotho, which initially had one of the highest tariff rates in the world, has seen its tariff rate cut to15 %. * Manufacturing output saw a slight year-on-year increase, bringing cautious optimism to parts of the economy.  Global * International markets have responded to uncertainty around US tariff policy and signs of slower American growth. The UK and Japan are on an upward trajectory; most other markets are flat or down. * The Bank of Japan kept rates steady in response to risks from American tariffs. * Argentina’s markets fell amid government intervention concerns. * Commodity news includes a potential structural shortage in the global aluminium market, and European stocks have shown mixed performance. * Globally, investor sentiment is cautious as central banks and policymakers assess inflation and trade disruptions. United States * S&P 500, and Nasdaq all reached record highs, with the S&P 500 gaining about 0.7%, the Dow up 0.7%, and the Nasdaq climbing roughly 1.5% for the week ending September 19, 2025. The Russell 2000 also surged nearly 3% and posted its seventh consecutive weekly advance. * Over the last week in the USA, the Federal Reserve made its first interest rate cut of 2025, reducing the benchmark Federal Funds rate by 25 basis points to a range of 4.00% – 4.25%. * Manufacturing activity varied by region, with contraction in New York but expansion in Philadelphia; housing starts fell to the lowest annual pace since May, while business inventories and sales increased modestly. GDP growth forecasts for 2025 remain positive at around 1.7%, slightly higher than previous expectations, though consumer spending growth is expected to moderate.  Trump’s UK visit Sir Keir Starmer has claimed the big winners from Donald Trump’s state visit were the British public, who he argued had reaped the economic benefits flowing from the pageantry and praise ladled on the president. Starmer, whose courting of Trump is seen as one of the few big successes of his premiership, has succeeded in taming Trump’s tariffs on Britain, notably on cars, aerospace and — with slightly less effect — steel. This strategy, which might stick in the craw of anti-Trump fans, is smart. It shows a good understanding of the personality of the MAGA cult and his ability to do huge harm to companies, individuals and countries that cross him, or criticise him. Any media personality who dares to have a sense of humour is currently in his firing line, with several very well-known late-night comedians being ‘cancelled’. The graph below shows changes in viewership of the major news stations in the last 10 years. Most of the decline is due to the rise in popularity of streaming platforms, especially in the non-Boomer demographic. The current trend of cancelling opinions that criticise the Donald, like all good dictatorships, is likely to push more ‘news’ onto streaming platforms. Social media platforms (including TikTok) are already cancelling left-leaning content. America’s much-loved First Amendment (freedom of speech) is clearly in the firing line.  Interestingly, and something that will probably be lost on Trump (because it’s exactly what he does), the so-called £150bn of investment by US companies in Britain was nothing more than adding up a series of planned commercial decisions to come up with a big number, then claiming some of the credit. UK tech investors and entrepreneurs broadly welcomed the plans to build several new computing facilities dedicated to artificial intelligence. Nvidia chief Jensen Huang had earlier this year highlighted the UK’s “surprising” lack of AI infrastructure. Microsoft said it would spend $30bn (£22bn) in the UK over the four years to 2028, of which half would go towards building AI infrastructure, including the UK’s largest new supercomputer. Nvidia said it would invest £ 500 million in UK cloud computing start-up Nscale as part of a deployment of 120,000 of its chips in the UK, giving the country the largest cluster of AI computing power in Europe. Huang also pledged to do more to support the UK’s AI start-up ecosystem, which he said had been “supercharged”. The opening up of the UK to Silicon Valley’s technology and investment will be a win for the US as it vies with China in the battle for global AI sovereignty (see RSA’s AI updates below). The memorandum of understanding between the two countries points to the UK’s so-called “advancing pro-innovation AI policy frameworks”. Some have interpreted that as an agreement by Britain to implement lighter-touch tech regulation. The Trump administration has fiercely criticised the UK’s plans to stop new domestic oil and gas exploration. But on nuclear energy, the two countries are more aligned (windmills were catching a break this week). Last week, the US and the UK signed a deal to speed up nuclear reactor design checks by lessening duplication between their two regulators, fulfilling a long-held wish among developers of new advanced or modular designs. Meanwhile, UK and US companies, including Centrica, X-energy, Holtec and Last Energy announced tie-ups to develop small modular or microreactors in the UK. UK engineering giant Rolls-Royce said it had entered its small modular reactors into the US regulatory process. The planned projects in the UK could provide an important boost to Britain’s power supplies in the 2030s, helping to meet growing demand from electric cars and data centres. Hopes that Trump’s visit would cement a deal announced in July to reduce tariffs on steel exports to the US to 0 per cent were dashed even before the president landed on British soil. The government said before his arrival, it had conceded a permanent 25 per cent levy that would provide “stability” for the industry. Although the 25 per cent levy is less than the 50 per cent tariff slapped on other countries’ exports, it will increase pressure on an industry that is already struggling with high energy prices and a glut of Chinese steel. The 25 per cent tariff hits not just UK steel manufacturers but also other companies that use steel in products that they export to the. The US is the UK’s second most important export market, totalling 9 per cent by value of exports. The reality is that the deluge of heavily subsidised steel flooding into international markets is forcing countries across the world to erect trade barriers to protect their industries.  RSA and AI With South African institutions like UCT, embracing rather than demonising the use of AI in academia, it’s no surprise that South Africa has made significant progress in data warehousing, supercomputing, and artificial intelligence, led by national initiatives and state-of-the-art research infrastructure. Data warehousing in South Africa involves using centralised repositories to store and manage structured data, often to support analytics and business intelligence for organisations. Leading multinational technology firms such as Microsoft, Google, IBM, Intel, and others have invested heavily in South Africa’s data centre and warehousing ecosystem, both to serve local business needs and as a hub for regional operations. South Africa’s leadership in supercomputing is anchored by the Centre for High Performance Computing (CHPC), part of the National Integrated Cyber Infrastructure System (NICIS). The CHPC operates “Lengau,” Africa’s fastest supercomputer, with over 40,000 cores and speeds exceeding 1,000 teraflops, supporting research across physics, data science, astronomy (for example, the SKA project), and more. The facility also offers advanced GPU clusters, vast data storage, and regional training for computational science. South African AI development is coordinated through entities such as the South African Artificial Intelligence Association (SAAIA) and projects like the Responsible AI Network (RAIN). These initiatives focus on advancing responsible AI adoption, governance, and workforce training, as well as the development of national-scale AI systems for sectors ranging from security to agriculture. All of this is very good news, we are at least trying ot to get left behind.  |
| The Fed cut Thankfully, there was no jumbo 50 basis-point cut from the Federal Reserve’s FOMC (Federal Open Market Committee); the markets can do without any more shocks this year, I think. Unsurprisingly, only one governor — new arrival Stephen Miran, a Trump appointee, who had only just gotten his feet under the desk — wanted a jumbo cut. The other two dissenters from the last round, who are also pretenders to Powell’s crown next year, did not follow suit. Everyone else coalesced around a more moderate 25 basis-point easing. By the end of trading in New York, the market had come to a collective judgment that, at the margin, the Fed was somewhat more hawkish than had been expected. Traders only came to this conclusion after some wild gyrations, but stocks and two-year bond yields ended barely changed while the dollar and the 10-year yield rose a bit — classic signs of a “hawkish cut:” (In other words, there are signs that further cuts could be kicked down the road; there are only two more FMOC meetings this year). The Fed has a dual mandate, inflation and employment, and Chairman Jerome Powell used his press conference to increase the weight the Fed gives to the employment side of the mandate, rather than inflation. With both inflation and unemployment rising, it’s a clear indication that the central bank thinks it might have to be more lenient in future. Critically, he could “no longer say” that the labour market was “very solid.” The labour demand has softened, and the recent pace of job creation appears to be running below the breakeven rate needed to hold the unemployment rate constant. The overriding message was that he is still being very cautious, especially around the inflationary impact of tariffs on inflation, as he said… “There are no risk-free paths now.” This meeting left little decided. That’s why key markets hardly moved. There is a shoe to drop (tariffs), but it hasn’t dropped yet. Most obviously, the Fed funds futures’ implicit prediction for the rate at the end of this year barely budged. It’s a volatile series, with huge moves after FOMC meetings or big data releases.  Of course, the interest rate cut is not Powell’s decision; he is just the voice of the FOMC, with the decision being made by the “C” – the committee. Once a quarter, the governors put out a dot plot, which gives their estimates for future rates. Looking at the “dot plot” — the quarterly exercise in which all the Fed governors and regional presidents give their estimates for the future path of rates and for the main economic variables — again, it’s the lack of movement that stands out (look at 2026, 2027, 2028 – little movement, maybe another 50bps next year). Bear in mind that President Donald Trump is on record as favouring a 1% cut. Fed funds futures concur that very little changed. Traders continue to think that the FOMC will have to cut more than the dot plot implies, but this meeting nudged expected rates up slightly, not down: They’re nervous about the labour market, but on balance don’t expect it to deteriorate significantly. Meanwhile, the single most startling revelation of the day was perhaps not as significant as it looked. There was a dramatic outlier. Although the dots are anonymous, there can be no doubt that it’s Miran. In June, nobody thought rates would drop as far as 3.5% by the end of year. This month, there is one voter who expects rates to drop below 3% by then, although the rest remained unchanged: It’s only for this year that Miran is such a clear outlier. This looks like a gesture more than anything else, and it’s hard to take seriously. Miran has complained, with some justification, that the Fed is infected by groupthink, and greater diversity of views is helpful. But he is predicting the kind of move in three months that historically only happens at times of financial crisis. He might have had more influence over his new colleagues if he hadn’t suggested something so extreme (but clearly, impressing Trump was more important). Governor Christopher Waller dissented in favour of a cut at the July FOMC. That helped him build a strong candidacy to take over as chairman when Powell stands down next year. Prediction markets had him as a favourite. He must surely have known that his chance of getting the top job, which is effectively in the gift of Trump, would be helped by voting for a jumbo cut. But he didn’t. Neither did Michelle Bowman, another governor who dissented last time and also has a shot at the chairmanship. Their actions have significance that goes beyond the race for the chairmanship. Waller and Bowman will still be governors next year. In February, the seven governors based in Washington have the chance to veto nominees for the presidencies of the regional Feds. That could, in theory, be the moment when a group of four Trump appointees (Miran, Waller and Bowman, and a successor for the embattled Lisa Cook) ensures a pro-Trump majority for the whole FOMC. Cook’s firing still needs to pass muster with the Supreme Court. Even if she goes, today’s events indicate that the chance of an imminent White House takeover of the Fed has been overdone. By not dissenting, Waller and Bowman showed they may not be willing to play the role of obedient political stooges.  Metals are having a moment in the sun Pivots by the Fed have a way of reviving the metals market. When Paul Volcker eased off his aggressive monetary policy in 1982, copper and its peers roared back — just as gold had enjoyed an epic boom in 1980 when the Fed appeared to have lost control of inflation. The latest metals rally had a similar spark — a softer Fed, amplified by a geopolitical backdrop that favours stockpiling.  Graph: Copper price You can see from the above graph that we’re not exactly talking about an exciting investable asset like gold, but the prices significantly impact industry and manufacturing. Well before investors fully priced in a rate cut, Trump’s tariff threats had already jolted copper markets to historic highs. The eventual levies proved less damaging than feared, and prices have stayed aloft on hopes for policy easing. The tailwind from the Fed has been nearly universal for metals as reflected by the almost 6% surge in the Bloomberg Commodity Industrials index over the past month: We spoke about copper in a newsletter earlier this year. The upswing is notable, and year-to-date gains of as much as 15% ahead of the FOMC meeting last week. Typically, lower rates support commodities by boosting demand while weakening the dollar, which makes them more affordable for buyers using other currencies. The greenback is down more than 9% this year: DXY Index Slowing economic activity and trade uncertainty have led to inventory accumulation for both base and precious metals (thankfully, tariffs are not imposed on many of these metals). China’s demand for metals has also been a factor. Consumption in the world’s biggest copper market rose by about 10% in the first half. Still, analysts caution that the second half is unlikely to match the first, as fresh signs of weakness emerge, potentially subduing copper demand. Aluminium, which also enjoyed a rally ahead of the FOMC, is closing on its longest run of gains in more than a year. It has climbed more than 17% since bottoming out in the aftermath of the April 2 tariff announcements. As with copper, a slowdown in China would create headwinds. Regarding gold, up by an impressive 40% plus year-to-date, the Fed’s stance is crucial.  Gold’s march toward $4,000 an ounce comes as 30-year Treasury rates move toward 5%. Monetary authorities now own more gold than Treasuries, although their pace of purchases has decelerated this year. The world’s central banks aren’t just hedging; they’re sending a message. The growing shift into gold reflects doubts about the dollar’s long-term supremacy. With stablecoins backed by Treasury bonds and cryptocurrencies swelling to nearly 10% of the combined money supply of the US, Europe, and China, the global financial order is tilting. In that upheaval, gold is quietly reclaiming its place as the ultimate anchor?  China, an economic update China’s electric-vehicle sector has become increasingly competitive amid a long-running price war. The number of brands selling battery-powered and plug-in hybrid vehicles has been whittled down from 500 to 129 in recent years. And just over a dozen of those are expected to be financially viable by the end of the decade. The problem? Still too many cars and not enough buyers. Manufacturing overcapacity isn’t just an issue for the EV industry, as factories throughout the country produce more goods than there’s demand for — both at home and abroad. As companies keep cutting their prices to entice customers, it’s a cycle of destructive hyper-competition that brings ever-diminishing returns. This has added to deflationary pressures in the world’s second-largest economy, prompting the government to try to rein in the overcapacity, and raising the prospect of further economic stimulus being introduced. It’s also created tension with trading partners as Chinese producers look to export more of their low-cost goods. As smaller players fold and competition intensifies, bigger brands are taking market share — but the consolidation has yet to peak. How did China build up excess manufacturing capacity? Local officials in every Chinese province, city and even district have their own growth targets to support the national economy. Historically, the property sector was a key pillar of growth, but the real estate downturn in recent years meant manufacturing became even more important to meet the targets. Local authorities backed new production capacity with subsidies and other support, particularly for the “new three” drivers of economic growth identified by the central government — EVs, batteries and solar technology — and the high-tech manufacturing sectors emblematic of what President Xi Jinping calls “new productive forces.” China’s central government has long encouraged investment in certain industries considered a priority, such as chipmaking and automobiles. The International Monetary Fund estimated that fiscal support for these “favoured sectors” — in the form of cash subsidies, tax benefits, and subsidised credit and land — amounted to around 4% of GDP annually over the last decade. This causes the problem of ‘dumping’ elsewhere in the globe – using subsidies, etc to overproduce cheap goods that are dumped in a country and squeezing out local competitors is one of the nasty side effects of ‘open trade’ and is quite rightly blocked. The manufacturing expansion fueled by this investment made China the dominant force across global supply chains — for example, it’s home to almost 80% of the world’s capacity to make solar modules, according to BloombergNEF. But this growth has outpaced demand to the point that China’s capacity to make solar modules was nearly double what the world required last year, and module makers are struggling to turn a profit. Across sectors, such overcapacity has sparked a race to the bottom for prices and an erosion of corporate profits. Share of industrial firms that are loss-making reached the highest level since 2001 last year. While lower prices may initially appear positive for consumers, the strain on companies’ profit margins is a threat to the broader economy. Firms could be forced to cut costs and lay off staff, reducing households’ income and spending. This could prompt further price cuts to attract customers and maintain market share, resulting in a downward spiral. If people hold off on purchases in the hope that prices fall further, it could exacerbate the vicious cycle of ever-lower prices and depress economic activity even more. Prolonged deflation could put China at risk of experiencing its own version of Japan’s “lost decades” of economic stagnation. Already, the malaise has translated into China’s longest streak of deflation since the 1990s. As of the second quarter of this year, the GDP deflator — a broad measure of prices across the economy — had declined for nine straight quarters. The price decreases are prevalent throughout more sectors than during China’s last battle with overcapacity and deflation in 2015. Almost all major sectors have recorded a negative GDP deflator in the latest cycle of deflation How is the government trying to address China’s overcapacity problem? At a meeting on economic policy in July, China’s top leadership pledged to crack down on “disorderly” price competition, and this campaign is reaching across industries. The National Energy Administration is carrying out inspections of coal mines and has warned it could shutter sites whose output is above permitted levels. A sweeping overhaul of the petrochemicals and oil refining sector is planned, whereby smaller facilities will be phased out, outdated operations upgraded to increase their yields, and plants encouraged to shift to speciality chemicals used for cutting-edge applications such as artificial intelligence and batteries. The thing is that China Has Positioned Itself as the World’s Factory Its share of global manufacturing value added is almost 30%. Trump has cited the US trade deficit with China, which topped $295 billion in 2024, as a key reason for the new duties he imposed on Chinese goods this year. The high tariffs, which for a short time were in the triple digits, prompted China’s producers to pivot from the US to selling to other markets. This strategy meant that while Chinese exports to America slumped by a third year-on-year in August — the fifth month of double-digit declines — total overseas sales rose by 4% as shipments to Asia, the European Union and Africa increased. China could be on track for a record trade surplus of more than $1.2 trillion this year. The growing imbalance suggests the country’s factory engine will remain reliant on external markets to absorb products the domestic economy can’t consume. The danger is that such spillovers could eventually spur more governments abroad to implement protectionist measures, such as anti-dumping tariffs, making life more difficult for Chinese companies struggling with excess production.  Australia for a change Australian unemployment held steady last month even as the economy shed jobs with fewer people looking for work, signalling the labour market remains tight and reinforcing the Reserve Bank’s cautious approach to policy easing. The jobless rate was unchanged at 4.2% in August, matching economists’ forecasts. The Australian dollar and yields on policy-sensitive three-year government bonds both fell. Traders expect the RBA’s rate-setting board to leave interest rates on hold at 3.6% this month after three cuts this year, with a fourth reduction seen more likely in November. Jobs data is crucial for the RBA’s rate-setting board as the resilience of the labour market, and worries about it rekindling price pressures, have been among the factors driving a cautious approach in the current easing cycle. RBA’s Governor Michele Bullock has signalled a couple more” cuts will be required to achieve the RBA’s latest forecasts. Assistant Governor Sarah Hunter said earlier this week that the economy is close to full employment. Australia’s labour market has been a bright spot in the economy, though there are some recent signs of slowing — recruitment activity has come off, and the rate of job switching has eased more rapidly than other labour market indicators. That suggests workers aren’t shifting jobs in search of higher pay at the same pace, typically due to less confidence about demand. Global uncertainty is also elevated with the outlook clouded by the Trump administration’s protectionist policies, heightened geopolitical tension and a slowdown in Chinese demand.  Nvidia and Intel (and DeepSeek update) A few months back Cobie and I compared Intel and Nvidia, both chipmakers but with Intel’s prime seemingly in the rear view mirror. Then, last week Nvidia invests $5 billion in Intel for a 4% stake, the outlier is now AMD. This move could put could put the struggling chipmaker’s next-generation manufacturing technology on a stronger footing, even without a direct commitment from the AI chip leader to use that technology to make its own chips. The two firms agreed to a deal to supply chips to one another to create “multiple generations” of joint products. Those products will connect Intel’s central processors and Nvidia’s artificial intelligence and graphics chips with a speedy and proprietary Nvidia connection technology called NVLink. This could give Intel a leg up against rivals such as Advanced Micro Devices because its chips will be attached to Nvidia’s flagship products in a way that no other third-party chips currently are. The joint products – in early stages of development and likely to be made on future manufacturing lines – could also provide an indirect boost to Intel’s 14A manufacturing process slated for 2027. Analysts have said this process is critical to its success, and Intel itself has warned it may not be able to pursue 14A if the company fails to get enough customer commitments to justify the expense of building it. . Intel Foundry will supply central processors for the joint products and package chips from Nvidia for some of them, as part of the deal. Engineers from both companies will work together to turn Nvidia’s technology into a physical chip made at Intel. This is significant for both because Intel does not always use its own factories to craft its own chip design, often relying on TSMC (2330.TW), opens new tab, just as Nvidia does. But if Intel supplies the chips for the joint products and they prove to be popular, the partnership could help provide the production volumes that Intel needs to make its manufacturing investments viable, analysts said. Intel clinched its biggest daily gain since October 1987, jumping nearly 23% after Nvidia said it would invest $5 billion in the struggling U.S. chipmaker. For Nvidia, the deal also means better access to a large swath of business and government customers with decades of software written for Intel’s chips. The primary loser is AMD, which designs different types of chips that compete with Nvidia and Intel in their respective markets, according to industry analyst Gold. “Having two major competitors combining their efforts is not exactly a positive outcome for AMD,” Gold wrote. Deep Seek AI update Chinese AI developer DeepSeek said it spent $294,000 on training its R1 model, much lower than figures reported for U.S. rivals, in a paper that is likely to reignite debate over Beijing’s place in the race to develop artificial intelligence. The rare update from the Hangzhou-based company – the first estimate it has released of R1’s training costs – appeared in a peer-reviewed article in the academic journal Nature published on Wednesday. DeepSeek’s release of what it said were lower-cost AI systems in January prompted global investors to dump tech stocks as they worried the new models could threaten the dominance of AI leaders including Nvidia (NVDA.O), opens new tab. Since then, the company and founder Liang Wenfeng have largely disappeared from public view, apart from pushing out a few new product updates. The Nature article, which listed Liang as one of the co-authors, said DeepSeek’s reasoning-focused R1 model cost $294,000 to train and used 512 Nvidia H800 chips. A previous version of the article published in January did not contain this information. Training costs for the large-language models powering AI chatbots refer to the expenses incurred from running a cluster of powerful chips for weeks or months to process vast amounts of text and code. Sam Altman, CEO of U.S. AI giant OpenAI, said in 2023 that the training of foundational models had cost “much more” than $100 million – though his company has not given detailed figures for any of its releases. Some of DeepSeek’s statements about its development costs and the technology it used have been questioned by U.S. companies and officials. The H800 chips it mentioned were designed by Nvidia for the Chinese market after the U.S. in October 2022 made it illegal for the company to export its more powerful H100 and A100 AI chips to China. U.S. officials told Reuters in June that DeepSeek has access to “large volumes” of H100 chips that were procured after U.S. export controls were implemented. Nvidia told Reuters at the time that DeepSeek has used lawfully acquired H800 chips, not H100s. In a supplementary information document accompanying the Nature article, the company acknowledged for the first time it does own A100 chips and said it had used them in preparatory stages of development. “Regarding our research on DeepSeek-R1, we utilised the A100 GPUs to prepare for the experiments with a smaller model,” the researchers wrote. After this initial phase, R1 was trained for a total of 80 hours on the 512 chip cluster of H800 chips. One reason DeepSeek was able to attract the brightest minds in China was that it was one of the few domestic companies to operate an A100 supercomputing cluster. DeepSeek also responded for the first time, though not directly, to assertions from a top White House adviser and other U.S. AI figures in January that it had deliberately “distilled” OpenAI’s models into its own. On a personal note (because some of you have been asking), I use all the popular AI models, often typing in the same prompt into all of them and comparing results. In what I use AI for, DeepSeek continues to be very disappointing, giving dated and inaccurate results. Perplexity is still my (and Cobie’s) go-to. (If you have a PayPal account, you can get a year’s free sub to Perplexity Pro. (Here’s a link to Sabrina’s TikTok on it (great AI content creator), if you’re interested.) Author: Dawn Ridler  Understanding Market Valuations: A Guide to PE and CAPE Ratios When evaluating whether stocks are expensive or cheap, professional investors rely on several key metrics that help them peer into the future. Today, we’ll explore two powerful valuation tools – the PE ratio and the CAPE ratio – and discover what history tells us about their ability to predict long-term returns. The PE Ratio: Your Starting Point for Valuation The Price-to-Earnings (PE) ratio is perhaps the most widely used valuation metric in investing. Simply put, it tells you how much investors are willing to pay for each rand of a company’s annual earnings. If a company earns R10 per share and its stock trades at R150, the PE ratio is 15 (R150 ÷ R10). Think of it as asking: “How many years of current earnings would I need to pay back my investment?” A PE of 15 means you’re paying 15 times current earnings for the stock. However, the PE ratio has a significant weakness. During economic downturns, company earnings can plummet, making the PE ratio temporarily spike and giving false signals about valuation. This led Nobel Prize winner Robert Shiller to develop a more robust alternative. Enter the CAPE Ratio: A Clearer Long-Term View The Cyclically Adjusted Price-to-Earnings (CAPE) ratio, also known as the Shiller PE, solves the PE ratio’s shortcoming by using a 10-year average of inflation-adjusted earnings instead of just one year’s results. This smooths out the inevitable ups and downs of business cycles, providing a more stable foundation for long-term investment decisions. The CAPE ratio is calculated by dividing the current market price by the average real earnings over the previous decade. This approach helps investors see through temporary economic volatility to assess whether markets are fundamentally expensive or cheap. What History Teaches Us About CAPE and Future Returns The relationship between CAPE levels and subsequent stock market returns is remarkably consistent and powerful. Research spanning over a century shows a strong negative correlation – when CAPE ratios are high, future 10-year returns tend to be low, and vice versa. There will be variability around the subsequent 10-year returns – the chart below indicates the general trend.  As the chart demonstrates, this relationship holds across different CAPE levels for both the US and South African markets. When investors buy stocks at low CAPE ratios (below 15), they historically achieved annual returns of 10-17% over the following decade. Conversely, purchasing at high CAPE levels (above 30) typically delivered modest single-digit returns or even losses. Currently, the US market trades at a CAPE ratio of approximately 37, well above its long-term average of 16-18. This places current valuations in the 96th percentile since 1900, exceeded only during the 1929 crash, the 2000 dot-com bubble, and the 2007 financial crisis. For South African investors, the JSE All-Share Index has historically shown similar patterns, though with the added volatility typical of emerging markets. The Concentration Problem: Why Stock Picking Matters More Than Ever Here’s where the story gets particularly interesting for individual investors. Today’s high market PE ratios are largely driven by a small number of mega-cap companies. In the US, the “Magnificent Seven” technology stocks now account for over 30% of the S&P 500’s total value. This extreme concentration means the overall market’s elevated valuation doesn’t tell the whole story. Many smaller companies trade at much more reasonable valuations, creating opportunities for selective investors. This true in the South African equity markets too. The Bottom Line for South African Investors The current environment presents both challenges and opportunities. High CAPE ratios in major markets suggest lower returns over the coming decade, but this doesn’t mean all stocks are expensive. The key insight is that aggregate market metrics mask significant variation among individual companies. The PE and CAPE ratios remain powerful tools for long-term investors, but they work best when combined with careful individual stock analysis. In today’s concentrated markets, the ability to identify reasonably valued companies becomes not just an advantage, but a necessity for achieving satisfactory long-term returns. While high market valuations suggest caution, remember that these metrics are marathon indicators, not sprint timers. Patient investors who understand valuation principles and practice selective stock picking can still find opportunities, even in expensive markets. Author: Jonathan Brummer EXCHANGE RATES:  The Rand/Dollar closed at R17.33 (R17.37, R17.58, R17.65, R17.44, R17.61, R17.74, R18.15,R17.76, R17.72, R17.90, R17.58, R17.89, R17.99, R17.92, R17.77, R17.95, R17.88, R18.04, R18.16, R18.39, R18.64, R18.89, R19.12, R19.10, R18.36, R18.21, R18.18, R18.20, R18.71, R18.35, R18.38, R18.41, R18,67, R18.38, R18.73, R18.03, R18.05, R18.11, R18.21,)  The Rand/Pound closed at R23.35 (R23.55, R23.73, R23.84, R23.53, R23.84, R23.84, R24.09, R23.88, R23.76, R24.22, R24.08, R24.49, R24.22, R24.35, R24.05, R24.18, R24.14, R23.95, R24.16, R24.40, R24.82, R25.10, R25.01, R24.73, R23.78, R23.55, R23.52, R23.50, R23.53, R23.19, R23.12, R22.85, R23,16, R22.93, R22.80, R22.99, R22.98, R22.72, R22.99, R22.73, )  The Rand/Euro closed the week at R20.35 (R20.38, R20.61, R20.62, R20.44, R20.56, R20.64, R21.04, R20.86, R20.61, R20.93, R 20.70, R20.91, R20.74, R20.68, R20.24, R20,37, R20.27, R20.13, R20.43, R20.78, R21.21, R21.52, R21.72, R20.93, R19.95, R19.72, R19.83, R19.72, R19.41, R19.20, R19.29, R19.02, R19,35, R19.31, R19.23, R19.09, R18.87, R19.19, R18.85, ,)  Brent Crude: Closed the week $66.57 ($66.80, $65.52, $67.38, $67.73, $66.08, $66.07, $69.46, $68.29, $69.21, $70.58, $68.27, $67.39, $77.27, $74.38, $66.56, $62.61, $65.41, $63.88, $61.29, $65.86, $67.72 $64.76, $65.95, $72.40, $72.13, $70.51, $70.33, $73.03, $74.23, $74.51, $74.65, $76,40, $77.60, $79.98, $71.00, $72.38, $75.05, $70.87, $73.86, $73.99).  Bitcoin closed at $115,838 ($115,770, $110,752, $108,923, $114,916, $117,371, $118,043, $113,608, $118,139, $118,214, $117,871, $108,056, $107,461, $103,455, $105,017, $105,643, $104,049, $103,551, $104,615, $96,405, $94,185, $84,571, $84,695, $82,661, $83,074, $84,889, $82,639, $83,710, $85,696, $96,151, $96,821, $96,286, $99,049, $104,559, $104,971, $99,341, $97,113, $97,950). Articles and Blogs: Spoiled for choice NEW Who needs a plan anyway NEW 8 questions you need to ask around retirement What to do when interest rates drop How to survive volatility in your investments What to do when interest rates drop Difficult Financial Conversations Financial Implications of Longevity Kick Start Your Own Retirement Plan You matter more than your kids in retirement To catch a falling knife Income at retirement 2025 Budget Apportioning blame for your financial state Tempering fear and greed New Year’s resolutions over? Try a Wealth Bingo Card instead. Wills and Estate Planning (comprehensive 3 in one post) Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |