| The podcast to this newsletter can be found here. Market View Markets around the world seem to be shrugging off the upcoming tariff uncertainty and keep on hitting record highs.  S&P 500 and Nasdaq hit fresh all-time highs. Nvidia, Microsoft, and Meta led the tech surge. The Dow Jones broke 40,000 again, its best week since May.  Markets are pricing in a “Goldilocks” outcome: inflation easing, rates dropping, and growth holding. But it’s a fragile bet. A weak earnings season or geopolitical wobble could pop this bubble. Much of the rally is narrow, driven by megacap tech. Broader indexes (like the Russell 2000) are lagging.  Graph : Russell 2000 The S&P 500 is back trading at more than three times sales multiple, close to a record.A sales multiple is a financial metric used to value a company by comparing its total enterprise value (EV) or market capitalisation to its annual sales or revenue. It is calculated as:  This ratio helps investors and analysts assess how much the market is willing to pay for each unit of a company’s sales, providing a relative measure of valuation across companies or industries. Sales multiples are especially useful for valuing companies that may not yet be profitable, as they focus on top-line revenue rather than earnings. The choice between using enterprise value or market capitalisation depends on the context, but EV is more commonly used as it accounts for both equity and debt, offering a fuller picture of a company’s value.This is a metric we don’t often look at, as other measures are generally more critical of a companies performance,.. Sales lead to earnings, and that is going to be the driver (or not) of the US bourses going forward.  Sales multiples can widen like this because profit margins have boomed since the pandemic. If companies keep a higher proportion of their revenues as profit, then it makes sense for the revenue multiple to increase. Tariffs are going to put pressure on margins – how much of the tariffs are companies going to ‘suck up’? Cobie and I often talk about yields and their importance in investment portfolios. This rally, combined with sticky Treasury yields as the Federal Reserve resists cutting rates, has brought the earnings yield on the S&P (the inverse of the price/earnings multiple) in line with the 10-year Treasury yield. If you buy a stock for R100 and the company earns R8 per share, your earnings yield is 8%. It’s like saying, “For every rand I invest, I’m getting 8 cents of profit from the company.”  Essentially if you buy now in the US, and you are receiving no compensation for the extra risk of stocks compared to bonds. That is unless earnings expand in 2025 thus allowing for the stock market valuation to be sustained. There is also a belief that rates and longer-term yields will soon fall. That’s in part because of the increasing pressure on the Fed, and the likelihood that it will soon be under the charge of someone more dovish. Any signal that the Fed’s independence is in question would do further damage to the dollar, but that would not be a problem for domestic investors in US equities. There’s also a prevalent belief that the Fed should cut rates. That would follow from a belief that tariffs’ impact on inflation is exaggerated and also from concern over the housing market, which is showing serious signs of cracking. Powell has a hard decision to make later this month – drop rates and please the King, or hold rates because the economy is still too hot and inflation is not completely under control?  U.S. Jobs Market Non-farm payrolls are closely monitored, as they are seen as a leading indicator of the health of the US economy. June hiring was up modestly from May’s 144,000 increase in payrolls and beat the 118,000 jobs economists had forecast for last month. In addition to this, the unemployment rate dropped to 4.1% from 4.2% in May as the ranks of the unemployed fell by 222,000. Forecasters had expected the jobless rate to inch up to 4.3%.  Graph: Nonfarm payrolls – post pandemic Labour Department revisions added 16,000 jobs to April and May payrolls. Average hourly wages came in cooler than forecasters expected, rising 0.2% from May and 3.7% from a year earlier. Salaries can form a ‘sticky’ aspect of inflation, so this is a good sign, except for the workers who are having a very real cost-of-living crisis right across the West. Healthcare jobs increased by 39,000. State governments added 47,000 workers and local governments 33,000 (private payrolls were down).The job market has been the linchpin holding the U.S. economy up.  U.S. Tariff Pause Nearing Expiry – 9th July — Market Volatility Incoming? All those tariffs that Trump announced on ‘Liberation Day’ but kicked down the road are coming up for the due date – maybe Trump will delay them again, but I think that he is still smarting over the TACO Trump meme… let’s see what happens. Only 3 of the 195 tariffs have been negotiated to date. That’s one a month, at this rate it’ll take another 16 years, by which time he will be long gone. One way or another, if this issue keeps getting kicked down the roa,d the markets are going to make up their own mind as to the outcome. Right now, they seem to be betting on rolling extensions, but what if those aren’t forthcoming? • Supply chains get disrupted (again) • Costs rise for U.S. firms, inflation starts to spike again, and no interest rate drop • China and other countries could retaliate So far, mid-sized U.S. manufacturers have already paid circa $82B in extra costs from tariffs since 2018. This next round could amplify the pressure, just as hiring slows. US President Donald Trump said that his administration will start sending out letters to trading partners on Friday the 4th of July – setting unilateral tariff rates, which he said countries would have to begin paying on Aug. 1.Trump told reporters that about “10 or 12” letters would go out Friday, with additional letters coming “over the next few days.” “I think by the ninth they’ll be fully covered,” Trump added, referring to a July 9 deadline he initially set for countries to reach deals with the US to avoid higher import duties he has threatened. “They’ll range in value from maybe 60 or 70% tariffs to 10 and 20% tariffs,” he added. The top tier of that range, would be higher than any tariffs the president initially outlined during his “Liberation Day” rollout in early April. Those ranged from a 10% baseline tariff on most economies up to a maximum of 50%. Trump didn’t elaborate on which countries would get the tariffs or whether that meant certain goods would be taxed at a higher rate than others. Tariffs are typically paid by the importer or an intermediary acting on the importer’s behalf. But it’s often the end consumer who ultimately shoulders much of the cost. Trump announced the Vietnam deal (only the third in as many months) on Wednesday, saying that, the US would place a 20% tariff on Vietnamese exports to the US and a 40% rate on goods deemed transshipped through the nation, a reference to the practice whereby components from China and possibly other nations are routed through third countries on their way to the US. While the rates are lower than the 46% duty Trump imposed on Vietnam initially, they are higher than the universal 10% level. And many of the particulars of the deal are still unclear, with the White House yet to release a term sheet or publish any proclamation codifying the agreement. Still, investors who have eagerly anticipated any deals between the US and trading partners were buoyed Wednesday by the Vietnam announcement, which saw share prices of American manufacturers with facilities in the country rise. We’re going to have to wait and see what those letters bring… Many major trading partners, however, such as Japan, South Korea and the European Union, are still working to finalise deals. The president has expressed optimism about reaching an agreement with India but has spoken harshly about the prospects of an accord with Japan, casting Tokyo as a difficult negotiating partner. He intensified his criticism this week, saying that Japan should be forced to “pay 30%, 35% or whatever the number is that we determine.” Trump is ticked off that Japan won’t accept rice imports from the USA (without the 700% import tariff) despite their current shortage. No doubt Japan has already made import arrangements with Asian countries. Japan is notoriously resistant to bullying. The president on Tuesday also said he was not considering delaying this week’s deadline. Asked about any potential extension of talks, US Treasury Secretary Scott Bessent said earlier Thursday that Trump would make the final call. This comment by Bessent says it all: “We’re going to do what the president wants, and he’ll be the one to determine whether they’re negotiating in good faith,”  |
| Global Fragmentation The Bank for International Settlements (the “central bank of central banks”) warned that global fragmentation—particularly due to rising U.S. protectionism—is straining the international financial system. Who is the Bank of International Settlements?The Bank for International Settlements (BIS) is an international financial institution established in 1930 and headquartered in Basel, Switzerland. Often described as the “bank for central banks,” the BIS is owned by 63 central banks from around the world, collectively representing about 95% of global GDP. Its primary mission is to support central banks in their pursuit of monetary and financial stability through international cooperation, research, and the provision of banking services exclusively to central banks and international organisations. Originally created to oversee the settlement of World War I reparations, the BIS quickly evolved into a key facilitator of central bank cooperation, providing a forum for policy dialogue and coordination, as well as acting as a trustee and agent in international financial operations. The BIS is closely associated with the Basel Committee on Banking Supervision, which develops global banking standards such as the Basel Accords. Over the decades, the BIS has played a significant role in shaping the global financial system, adapting its functions to address emerging challenges and supporting financial stability worldwide.The major concern of the BIS is that Global debt levels are at historic highs. Swap lines, FX liquidity, and coordinated responses are thinning out. If there’s a shock (like a currency crisis or bond market selloff), central banks may not be able to act together, raising the odds of a full-blown panic. “In a fragmented world, local shocks can become global tremors.” We need to watch emerging markets with high external debt (Turkey, Argentina, and yes, South Africa), which could be early victims if global liquidity tightens.  AI Is Reshaping Investment Portfolios and work — 60/40 Asset Allocation Is Under Review Major asset managers (BlackRock, Brookfield, Goldman Sachs) have shifted tone. The old “60/40” portfolio is no longer seen as sufficient in an AI-dominated, volatile economy. AI isn’t just a tech story. It’s now: • Driving corporate margins and capex • Accelerating productivity (and layoffs) • Restructuring entire sectors (finance, law, logistics) This trend is moving very quickly, and my advice to anyone out there who is still working needs to start surfing the trend early on or risk being made redundant very quickly. As AI continues to proliferate and trickle down into businesses, expect increased volatility as old-school portfolios underperform. Perhaps tailored, active strategies may shine in this new environment. There are already many active ETFs, and frankly passive active funds too, found in the markets ( some of them perhaps not admitting to the fact). If you are using AI to help you write reports for a job, don’t be lazy and assume everything you’re being fed is true. We are still in the early days, and very few people have the skills yet to develop accurate agents to do the fact-checking and reference checking required. In an interesting RSA case last week, Lawyers for a precious metals processing firm have been referred to the Legal Practice Council (LPC) after being caught out using nonexistent case citations that a judge described as being “hallucinated” by artificial intelligence. The citations were included in the heads of argument in a recent case brought by Northbound Processing, a company trying to obtain a refining licence from SA’s Diamond and Precious Metals Regulator. Heads of argument are written submissions lodged with the court before a hearing, setting out each party’s legal points and arguments. They include the case law that will be used to support them. While the judge in the case acknowledged that Northbound’s legal team did not intend to mislead the court, the matter still needed to be investigated by SA’s legal regulator.  The BBB (Big Beautiful Bill) As of the 4th of July, the BBB became the BBL House Republicans overcame a critical procedural hurdle to advance Donald Trump’s ‘Big Beautiful Bill’ massive tax and spending package early Thursday, holding a key vote open for hours past midnight as the president and his allies worked to win them over.  The House finally voted 219-213 to essentially move toward a final vote which includes tax cuts to the top 20% of taxpayers (everyone else pays more) Republicans campaigned on a phase-out of Biden-era clean energy incentives (Alaska’s pristine landscape is now open to oil exploration) and funding for the president’s crackdown on illegal immigration. Despite Republicans controlling both the US House and Senate, Trump’s signature legislation ran into resistance from cost-conscious conservatives as well as swing-district moderates, who worry the measure cuts too deeply into Medicaid and other safety-net programs. In the end, they all bowed down to the King. The middle-class Americans who voted for this have got a year to find out just what it means to their healthcare, food stamps and take-home pay, and hopefully punish their Republican lawmakers accordingly. . In the end, Johnson lost just one Republican, representative Brian Fitzpatrick of Pennsylvania. The House vote in question was on the rule governing debate for the underlying tax measure. Historically, those are routine, party-line votes. However, in a House closely divided, they can also become a venue for opponents to flex their leverage and seek to win concessions. As House leaders furiously cajoled the holdouts and rebels, Johnson vowed to keep pressing through the night. “I’ll keep it open for as long as it takes to make sure we’ve got everybody here accounted for and all the questions answered,” A key issue for many reluctant Republicans is cost. The $3.4 trillion Senate bill adds more to the deficit than an earlier House version, which clocked in at $2.8 trillion, according to the Congressional Budget Office.  The waning dollar influence The US indices are back at an all-time highs. There are many reasons behind this, but it’s an America First stock market record. The benchmark is above its Feb. 19 level when denominated in dollars, but not when valued in any other major currency. This high owes much to the dollar’s depreciation: The rest of the world’s stocks have beaten the US by about 10 percentage points since then. In dollars, that means a nice gain:  This rebound has little to do with the giant tech platform groups that dominate the S&P. Since the previous high, Bloomberg’s Magnificent Seven index dipped much further during the alarm over the Liberation Day tariffs, but its performance is now bang in line with an index of the other 493 largest stocks: The selloff in the dollar was driven primarily by politics — growing realization that Trump 2.0 was serious about tariffs, followed by outright horror after the extreme levies announced on April 2, Liberation Day.  Graph: DXY index The Stockmarket rebound reflects the belief that a) the big Liberation Day tariffs will quietly go away for the most part (that may not be the case…) b) the levies already in place won’t hurt the economy or company bottom lines too much. News out last Thursday that Trump is ready to go back to blanket, bazooka tariffs, might just put a pin in that. It looks like Trump is going to go the typical work-shy route of sweeping tariffs with little consideration of the impact on the USA (we all know he doesn’t care about anyone else). Last week on Fine Music Radio which I was hosting for Michael Avery while he was away, I got to speak to Steven Joffe, the CEO of Invicta Holdings who have a manufacturing plant in the USA and he described the nightmare of now trying to source parts (none are made in the USA) from around the world, and the prospect of significant price increases coming down the pike for US consumers now that their stockpile from January is depleted. Multiply this times hundreds of thousands and you might get an understanding of just how this might play out. Author: Dawn Ridler  Jonathan Brummer Has joined Rexsolom Invest: We’re thrilled to welcome Jonathan Brummer to our team! He brings a wealth of experience and a passion for helping clients achieve their financial goals. We sat down with Jonathan to learn more about him. Jonathan, most recently, you worked as a Senior Asset Consultant at RisCura, where you managed approximately R90bn in institutional assets. What motivated your shift to advising individual clients, and what excites you most about this new chapter? I’ve spent two decades in the financial advice world, and I’ve worked in several areas. Building processes and modelling tools for financial planners as well as advising individuals and institutional investors. When working with large retirement funds and medical schemes, I was able to impact the investment outcomes for millions of individuals, which is a responsibility I enjoyed and took very seriously. I was also exposed to the very best investment thinking across the asset management industry, which was a wonderful learning experience. I’m now particularly excited about the direct, personal impact I can have on individual clients, as well as fulfilling an investment role at Rexsolom. At RisCura, you were part of various investment committees. Tell us about that. I was part of the asset allocation committee as well as the manager research committee. The role of the asset allocation committee is to determine the optimal asset allocation across portfolios. This involved macro-economic analysis to form a view on the health of the global economy and the influence of this could have on each asset class. We also modelled the expected returns of each asset class, based on underlying valuation metrics. The manager research committee then focused on finding the best managers in each asset class and allocating different managers to ensure we had a blend of different styles. This was done through a combination of both qualitative and quantitative analysis. My role as an investment consultant or portfolio manager was then to understand each client’s investment objectives and to construct a portfolio that was best placed to achieve those goals including the optimal asset allocation to appropriate managers. Risk management is also a crucial consideration. Having a clear risk budget and understanding how much of that risk budget is being taken up by each decision ensures that the ultimate portfolio can withstand most market conditions. Finally, the investment reporting was a key component that allowed us to attribute the outcomes to our decisions and to learn from them to improve future outcomes. The markets are dynamic and every day is an opportunity to learn and improve. I am hoping to use this rich experience as I join the Investment Committee at Rexsolom. As a CFA Charterholder and CERTIFIED FINANCIAL PLANNER® Professional, you hold two respected designations in the financial industry. How do these certifications complement each other in your approach to financial planning? They complement each other well. The CFA program provided me with a deep, rigorous understanding of investment analysis, portfolio management, and financial markets. The CFP® designation, on the other hand, honed my skills in comprehensive financial planning, focusing on areas like retirement planning, risk management, and uncovering clients’ values and goals. Together, these certifications allow me to approach financial planning with both a strong analytical foundation for investment decisions and a holistic understanding of a client’s entire financial life, ensuring well-rounded and effective advice. You mention that part of the process is about uncovering clients’ goals. Can you talk more about what you mean? Mitch Anthony asks the question: “Is your life about making money, or is your money about making a life?” And he uses the analogy of a hamster running on a wheel, with some money dangling in front of the hamster. If we are chasing money for the sake of it, we end up on this never-ending hamster wheel. Instead, imagine a sailboat with the sail of the boat being made from this same money. In this case, the money isn’t the goal. It’s not the destination we are sailing to. It’s just the tool that we use to get to the destination. So, part of the financial journey for clients needs to be a discussion around what clients really hope to achieve, before we can then make sure we are using their money in the best way possible. I also think we need to move beyond generic goals such as retirement and dig deeper into what clients truly value and would like to achieve. You have a particular interest in how to generate sustainable income for retirement from an investment portfolio. Can you tell us a bit more about why an income during retirement is different from saving for retirement? Saving for retirement is like climbing a mountain and most of us spend a very long time doing that. But once you retire and now have to climb down the mountain, things change completely. The risks are different, the muscles you use change and so this is a case of “What got you here, won’t get you there.” Retirees face two key risks. The first is that we don’t know how long we are to live and so we don’t know how long we need to plan for. Because of this uncertainty we end up having to plan for a very long period. The second risk is called sequence of returns risk. This means we don’t know when we will experience negative investment returns. It turns out that having negative returns in the 5 years before or after you retire has a very large impact on whether you could run out of money before you run out of birthdays. We can think of this as the fragile decade, and it needs to be managed very carefully. How would you go about creating a sustainable retirement income plan for clients? There are different approaches that may be interesting to delve into deeper in future. In my view the most sensible approach is described in the book, “Asset Dedication”, by Stephen Huxley and Brent Burns. This uses the same techniques that large insurance companies would use to guarantee that they can meet their liability payments. Rather than having one large investment portfolio, we would divide a client’s assets into an income portfolio and a growth portfolio, each with a very specific job. In the income portfolio, we use specific assets to cover anticipated future expenses. At Rexsolom, we refer to this as the income and growth block. The income portfolio provides an important buffer against negative investment markets. This is important because we want to avoid selling assets to fund expenses when markets are down. The income portfolio provides this buffer. When you’re not helping clients, what do you enjoy doing in your free time? I have a 3-year-old daughter and so spending time with her and my wife is incredibly important to me. I’m also a keen runner and try to get out on the trails as often as I can. EXCHANGE RATES:  The Rand/Dollar closed at 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, 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 R24.008 (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, 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 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, 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,)  Brent Crude: Closed the week $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, $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 $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, $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: Difficult Financial Conversations NEW Kick Start your own Retirement Plan NEW 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 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 |