| Cobie and I like to keep this newsletter and our podcast evolving. We’d love to hear from you about what you like or dislike and what you’d like more or less of – both in the newsletter and podcasts. Dawn will be running Michael Avery’s Classic Business show on Fine Music Radio at 6pm next week if anyone has the time to catch it. You can find it on DSTV 838, or streaming on www.fmr.co.za. Market View To follow US treasuries About 20 years ago (just before the Global Financial crisis (GFC)) , there was one fear above all that kept investors and regulators awake at night: global imbalances. In particular, there was fear over the huge growth in Chinese holdings of US Treasuries as the world’s new exporting powerhouse looked for a place to stash its profits. Why was this problematic? There was a belief that it kept long-term interest rates low (as there was a natural buyer of US treasuries keeping rates low). The FED started hiking short term rates in 2004 already but as can be seen from the below chart this had very little effect on US 10 year yields.In the summer of 2007 it looked as if 10 year yields were going to break through the 5% level. This was short lived as the GFC loomed and the FED had no choice but to drop rates which forced the 10-year yield lower as well. The treasury rate is the sum total of thousands of transactions and is probably a better gauge of market sentiment than the FED funds rate which is mostly set on backward looking data. This can have it’s pitfalls as was evident when the FED thought inflation was transitory a while ago. Those Treasuries, held by a foreign governments, is essentially a liability that the US owes to that State, and when Beijing became the largest holder of such bonds, this sent shivers down the spine of the Americans. They could, if they wanted to, cash in the bonds and effectively tank the US economy – and theirs with it of course as the US is their largest trading partner. There has however been a gradual decline in those holdings as seen in the graph below: Why was this problematic? There was a belief that it kept long-term interest rates low (as there was a natural buyer of US treasuries keeping rates low). The FED started hiking short-term rates in 2004 already but as can be seen from the below chart this had very little effect on US 10-year yields. In the summer of 2007, it looked as if 10-year yields were going to break through the 5% level. This was short-lived as the GFC loomed and the FED had no choice but to drop rates which forced the 10-year yield lower as well. The treasury rate is the sum total of thousands of transactions and is probably a better gauge of market sentiment than the FED funds rate which is mostly set on backward-looking data. This can have it’s pitfalls as was evident when the FED thought inflation was transitory a while ago. US Equity holdings I don’t think it is surprising to anyone who has been an investor for a while but the US has, by far, the biggest share of the global equity market. The graph below shows how this share has changed over the decades, and they are back at the all-time highs last seen in the dot com bubble. The reason for this is often cited as the ‘superior performance’ of US companies – but you can see that in the graph below there is a large gap between the market cap and earnings – the ‘hype’ gap? Foreign owners have a far greater role in the US equity market than they once did. The chart below shows how ownership of US equities has moved since 1945. Once dominated by wealthy American households, the market first institutionalized as mutual funds, pensions and then exchange-traded funds took dominant positions. Since the GFC, the story has been of the returning influence of individual owners (both a symptom and a cause of growing inequality), and ever-greater foreign influence: The one interesting side note on the trends above is that ‘passive funds’ and ETFs – the fastest growing slice, are not so passive anymore and are becoming the ‘tail that wags the dog’ as the underlying algorithms that drive them buy in and out of the highly traded stocks – like the Mag 7 for example – exacerbating the upward or downward movement as they do so. Flows have become particularly extreme since the pandemic. This is in part because of the excitement around the Magnificent Seven and also reflects the collapse of confidence in Europe. There has been a very small turnaround in this trend in the last few weeks – but it is far too early to tell if this is a blip or a trend. Europe accounts for 49% of foreign ownership in the US, so these flows matter. Now, the question is whether the money could leave as quickly as it came. Why is the US such a favourable destination? * A highly favorable demographic outlook versus other developed economies and China; the growth in the US working-age population is set to decline but remain positive (thanks to immigration), whereas in those other regions, especially in Europe, it is in outright contraction. The decades-long ‘one child’ policy in China has altered their demographics for years to come. * A structurally higher level of profitability for US companies and a successful tech sector implies an ongoing ability to earn higher margins. * Stronger geographic security of supply chains than other regions (war in Europe and the Middle East, and possible Chinese tensions over Taiwan). * Benefits from the scale of its home market. Sure, China has way more people but the per capita value difference between the two is still huge: US $65,875 China $12,175 (RSA $6250). * The dollar is still a reserve currency and is likely to be for years to come. In the current Trump administration, where MAGA now means Make America Alone Again, those ‘hard risks’, above, which take decades to change, are replaced by ‘softer’ risks. Specifically, capital that can move very quickly. As countries are forced to become more ‘self-reliant’ that is going to mean bringing capital back home. For example, countries with large pensions can involve the ‘prescribed asset’ conditions that we Saffers are all too familiar with, and actually happened in Mexico during the GFC. The result was a rally for the currency and a big surge for the stock market. As countries arm themselves with sovereign wealth funds, capital protectionism like this gets easier and easier to do. How big a deal will tariffs be? While there is still time between now and April 2 “Liberation Day” as the MAGA politicians like to call it, for Trump to backtrack, as is his want, if implemented those tariffs will have a huge impact on Europe, especially now that Automobiles and Pharmaceuticals are involved. Remember too that Cars are one of RSA biggest exports, many of those going to the States. South Africa exports approximately US$1.9 billion (R35bn) worth of vehicles to the United States every year under the African Growth and Opportunity Act (AGOA)—a trade arrangement that grants African countries, including South Africa, preferential access to the US market. Of all the European countries, Ireland will be hardest hit (mostly from Pharma exports). Obviously, there is going to be a knock-on effect on US inflation. Although the tariffs will reduce demand, it is the US consumer who ultimately pays for those tariffs. Those auto tariffs are a big deal, especially for Canada and Mexico. Many of the production lines of auto manufacturers are tightly integrated with Canada and Mexico, and have been for decades. New production lines, with skilled workers and or robots, can’t materialise out of thin air in weeks. There are so many unknowns: Will the other governments retaliate, or attempt to come to a deal; how tight supply chains are and whether the highly integrated US-Mexico and US-Canada production lines can even keep working; how much of the tariff the carmakers try to put on the consumer; and how consumers will respond. Even if Trump backs down from this, there is going to be a loss of trust by everyone, US auto manufacturers included, and that will lead to change – whether Trump likes it or not. Consumers outside of America could decide to increase their boycott of US goods – and you can’t play brinksmanship with millions of consumers who have made up their minds to vote with their feet and wallets. In time, this will have a ripple effect on the used car market in the US. The graph below shows the used car inflation and how this spiked over the pandemic (supply chain constraints). Middle America has a deeply entrenched gun and car culture, they will not like it one bit! Are you a Copper-Bug? We have talked a lot about the price of gold recently, but thanks to Trump’s intention to impose a 25% tariff on copper, this commodity has suddenly become interesting. Copper, of course, is widely used in electrical applications because it conducts both heat and electricity – especially in automotive industry and construction but has wide use in almost every aspect of our daily lives. (Anglo mine in Chile) While on the subject of gold, it continues to shine as an alternative for the highly volatile stock market as we can see in the graph below. Vietnam, Trade and Trump interests Vietnam was a popular destination for importers wanting to avoid the China stigma, and even China made use of this destination to get around the first round of Trump tariffs, which in all fairness, weren’t removed by Biden. In the background, the Trump Organization and its partner in Vietnam are working on multiple investments worth billions of dollars in golf courses, hotels and real estate projects in the Southeast Asian country. The plans by the family business of U.S. President Donald Trump are proceeding amid risks of U.S. tariffs on Vietnam, which has one of the world’s largest trade surpluses with Washington and last year exported goods worth 30% of its GDP to the United States. Put bluntly, they are scrambling to placate Trump. To rebalance the trade gap and avoid tariffs, Vietnam has pledged to increase imports from the U.S., cut duties and non-tariff barriers, and is also allowing Elon Musk’s Starlink to offer its satellite internet services in the country while retaining full control of its Vietnamese subsidiary under a pilot scheme that circumvents strict limits on foreign ownership. The first of these projects ($1.5bn) in Vietnam is due to break ground in May. This includes three 18-hole golf courses and a residential complex, and is the largest in East Asia for the Trump Organization. The first two courses are expected to be operational by mid-2027. The group is also involved in two golf clubs in Indonesia, one of which is under construction. Author: Dawn Ridler Diversification for the sake of it.. There is a lot of emphasis on US markets and their performance so far this year. Year to date, the S&P500 has lost -3% whereas the DAX has gained 13%. Here are some more numbers: Shanghai (0.5%), Nikkei 225 (-7%), FTSE100: 6%). It really is a mixture of different returns across world economies. Consider that after years of positive returns, there has now been some consolidation. Not a bad thing as markets can tend to consolidate and then grow again. At present 34% of companies listed on the S&P500 have prices that are ahead of their 50-day moving average. As I have said in previous weeks, the US market is very diversified and can show price anomalies in certain sectors or groupings which don’t really reflect the complete market. Take FISERV as an example. This company operates in the banking solutions market. It trades of a P/E of 41x and a Price to Free cash flow of 23x. It’s a good business but its model lends itself to incremental growth over time and thus investors should ask if the valuation of the company after a 42% price rise in the last 12 months isn’t too expensive. Consider that this company on average over a decade produce a ROIC of 6%. Now compare this to Meta: Fiserv: Meta: P/E: 41x P/E: 26x Price to Free cash flow: 23x Price to Free cash flow: 28x Last 12 months Return: 38% Last 12 months Return: 22% ROIC 10 yr avg: 6% ROIC 10 yr avg: 35% The companies are very different and are in completely different sectors of the market. Unless things radically change, the chances for Meta to grow is a lot higher. Interestingly, Fiserv knows that it operates in a mature market and has attempted to grow by acquisitions, making 24 major acquisitions since its founding. This has failed to lift the ROIC profile and hence today’s valuation is placing a lot of emphasis on the ROIC’s improving in the future. At an average ROIC of 6% it will take 12 years for this company to double in size whereas for Meta (35%) it’s going to take just over 2 years (compounded). This shows how just 2 players in a single market can vary greatly. There is a narrative in markets at present that suggests that diversification out of the US is the prudent thing to do after the US market has outperformed its international peers for years. The problem is what companies can be bought in these markets? Often their ROIC profiles look nothing like Meta and justifiably their valuations are a lot lower. This is what investors are focusing on … the lower valuations. It’s important but only half the story. What makes for a great media soundbite doesn’t necessarily stand the test of investing time. Author: Cobie Le Grange EXCHANGE RATES: The Dollar remains volatile but has stopped its steep decline. The Rand/Dollar closed at 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, R17.58, R17.60, R17.66, R 17.41, R17.48, R17.12, R17.42, R17.85, R17.82, R17.71, R17.85, R18.32, R18.26, R17.95, R18.23, R18.20) The Rand/Pound closed at 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, R22.72, R22.89, R22.75, R22.93, R22.90, R23.20, R23.44, R23.41, R23.13, R23.39, R23.28, R23.32, R23.34, R23.00, R22.63, ) The Rand/Euro closed the week at 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, R19.09, R19.07, R19.05, R19.19, R19.12, R19.47, R19.79, R19.72, R19.80, R19.70, R20.01, R19.94, R19.58, R19.74,) Oil The price of oil has been volatile this week and the main driver of the price rally has been the shifting landscape of global oil sanctions. U.S. President Donald Trump on Monday announced new 25% tariffs on potential buyers of Venezuelan crude, days after U.S. sanctions targeting China’s oil imports from Iran. The order added fresh uncertainty to buyers and saw the trade of Venezuelan oil to the top buyer, China, stall. Elsewhere, sources said India’s Reliance Industries will halt Venezuelan oil imports. The broader global dynamics for oil trade, however, pointed to a period of heightened uncertainty, as a blitz of U.S. tariffs against trading partner countries raises fears of a sharp economic downturn in a blow to oil demand. As a result, analysts don’t expect sharp gains in oil prices to be sustained in the current environment. The forecast for Brent crude for 2025 is still at around $76 ($80 in 2024). Brent Crude: Closed the week at $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, $75.57, $78.67, $77.95, $71.96, $74.68, $71.47, $76.99, $79.05, $79.09, $79.43, $77.56, $85.03, $83.83, $84.86, $85.22). Bitcoin closed at $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, $90,679.47, $79,318, $68,277, $66,989, $62,876 , $62,267, $65,596, $62,603, $54,548, $57,947, $63,936, $59,152, $60,847, $61,903, $59,760,). Articles and Blogs: Income at retirement NEW 2025 Budget NEW 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 Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion 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 |
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