| Welcome back to our Newsletter and podcast – We hope you had a great break and looking forward to a happy, healthy and above all, prosperous 2025. 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, what you’d like more or less of – both in the newsletter and podcasts. Do you have topics you’d like to hear a blog on? Do other people’s wealth journeys interest you? Market Watch Year-on-year the JSE is still a tad behind Wall Street, and trending slightly lower since the end of last year but not something to be overly concerned with at the moment.  The UK has been playing catch-up in the last few weeks.  As has Germany  (All graphs from Sharedata.co.za)  Europe From an investment perspective, it has been difficult to find quality investable stocks in Europe, but that seems to be changing. This month saw the largest rotation into European stocks in 25 years!  Shares in the Eurozone have underperformed the US for 17 years, in a trend accelerated by Donald Trump’s return to power. But in the last few weeks, the STOXX 50 index of European blue chips has enjoyed a bounce. It’s way too soon to say that a new trend is underway, but there are embers of enthusiasm for European equities out there:  Taking away the cruel comparison with the US, in absolute terms and denominated in Euros, the STOXX 50 is now its highest since the early weeks of 2000, while the broader FTSE Eurofirst 300 (which comprises of the 300 largest companies in the FTSE Developed Euro Index) is at an all-time high — a distinction the S&P 500 didn’t quite reach in US trading: Oddly, there’s no discernible hype about the region, whose issues range from the rise of the hard right to a potential split over fiscal policy at its core between France and Germany. If Ukraine is forced to capitulate to Russia because support from the US is cut off, then an emboldened Russia is going to be on the EU’s doorstep. Something to watch for as the year unfolds. In 2024, MSCI Europe underperformed the US by the greatest amount since 1975 in US Dollar terms.  Tariffs Just how bad has North American free trade been for the US? If Trump were to be believed the US has been screwed over royally. Nafta (the North American Free Trade Agreement) was thrashed out by George H.W. Bush and ratified under Bill Clinton before coming into force in 1994. Then Donald Trump renegotiated and renamed it the US-Mexico-Canada Agreement in one of the signature achievements of his first administration. The new treaty included a provision that it should be renegotiated again in 2026, but we now know that Trump wants to do it even sooner and is prepared to threaten 25% tariffs (not on the face of it permitted under the treaty) to force others to the table. Despite Trump’s discontent, US stocks have done far better than Mexico’s or Canada’s in the last 31 years, a gap that widened once Nafta became the USMCA. So it’s no surprise that anything that jeopardizes the agreement is considered market-unfriendly.  Economists often talk of “mean reversion” (economic cycles inevitably revert to an average/mean – usually by way of a ‘correction’. Are US equities overdue a correction? We have talked about this repeatedly for years – and if you ignore the pandemic blip, then we’re still waiting. After all the S&P 500 set all-time records about 60 times last year. The enthusiastic welcome to Trump suggests that investors believe once more that he’ll do the stuff they like (tax cuts and deregulation), but not the stuff they don’t — which means a bet that he’ll go easy on tariffs, by far the biggest source of uncertainty. To date, he’s suggested levies on all of America’s top four trading partners but hasn’t backed those threats with any action. Trading partner currencies aren’t factoring in massive tariff hikes. It’s clear that what Trump calls fair vs. free trade are very different. It should be noted that on Day 1, Trump announced tariffs on Canada and Mexico (25%) and is talking about 10% on China — not the 60% he was suggesting during the campaign. The graph below shows an interesting projection of the various tariff proposals.  In 2018 the tariffs in Season One of Trump did have a short-term impact on the stock markets, so if they are imposed again, the effect is expected to be short-term. You can see from the graph below that in the period from the beginning to the end of the so-called Trump trade war the markets were volatile, but essentially moved sideways.   Dollar strength – yes, more! The US dollar has been overvalued and entered the year reliant on Trump 2.0 tariffs to maintain its strength. The latest Bank of America survey of global fund managers shows a widespread belief that the US currency was overvalued — and also showed a slight reduction in optimism compared to the post-election surge in December. Trump can probably thank Inflation for his return to power, there is nothing like pandering to the working classes’ real fear of the cost of living crisis. Why bother with democracy when you have executive orders? Taking away the cruel comparison with the US, in absolute terms and denominated in Euros, the STOXX 50 is now its highest since the early weeks of 2000, while the broader FTSE Eurofirst 300 (which comprises of the 300 largest companies in the FTSE Developed Euro Index) is at an all-time high — a distinction the S&P 500 didn’t quite reach in US trading: Oddly, there’s no discernible hype about the region, whose issues range from the rise of the hard right to a potential split over fiscal policy at its core between France and Germany. If Ukraine is forced to capitulate to Russia because support from the US is cut off, then an emboldened Russia is going to be on the EU’s doorstep. Something to watch for as the year unfolds. In 2024, MSCI Europe underperformed the US by the greatest amount since 1975 in US Dollar terms. Trump’s orders — lifting the ban on leases and withdrawing from the Paris Climate Accord — are a delicate act of pleasing consumers and oil producers. Ironically the emergency declaration leaves energy companies worse off, as their margins will come under pressure. Sure, there is plenty of liquid gold under the surface in the US, but even gold is subject to the laws of basic economics. Further, it’s curious that incentives for further production are regarded as a prudent policy for a sector bedevilled by a supply glut. it is the oil price and not drilling permits, that will drive a meaningful increase in US oil production. Does the current oil production output justify declaring a national energy emergency? Of course not, it’s just an excuse for Trump to bypass that nuisance called Democracy and Free Markets. The US’s position as the lead energy producer is not in doubt. What then forms the basis for the emergency declaration? Trump hopes that producers will drill (and pump) more, driving the price down (and making them less profitable. Huh? Makes absolute sense) You can expect more US oil and gas producers (particularly smaller firms) to see greater profits from fewer environmental rules and regulations — as opposed to simply producing more. Also positive for the sector is Trump’s vow to refill the Strategic Petroleum Reserve, although — as with comprehensive federal permitting reform — both initiatives hinge on legislative action. With China near peak oil demand, however, it is much more likely that oil and gas demand is in terminal decline, even if Trump can delay the arc throughout his presidency. (On Thursday a bill was proposed to allow DJT to have a third term – (comment deleted for violating community guidelines). For now, finding a sweet spot that works for consumers and oil producers is a matter of foreign trade. Punitive tariffs can stifle fragile economies — hurting oil demand and causing prices to fall further, discouraging production. Why should we be worried about a trade war? A trade war could put further pressure on the global economy to slow down and could prevent China from achieving its growth targets and could push the euro zone into recession, just as they are picking up steam. If Trump can indeed resolve the Russia-Ukraine conflict, more oil would make its way to the market (at what long-term cost to Europe?). Most pundits believe that Canadian Tariffs are a non-starter and much of that talk, including his colonisation of Canada, Panama and Greenland, are just pandering to Trump’s Brotocracy ambitions. Oil prices and yields tend to move together, with big drops in oil accompanied by falling rates. However, this is often because of a crisis (when both fall together), and both tend to be a function of the broader macroeconomy. When times are good, both oil and yields will tend to rise. It’s not obvious that attacking the oil price in itself will bring down yields, although the case of 2014, when a breakdown in OPEC discipline caused a crash in the oil price, is interesting. That time, with the economy not in notably bad shape, yields came tumbling:  Watch this space with us.  BRICS Trump – or one of his Minions has discovered BRICS The good news is that (as usual) he hasn’t done his homework, and thinks that Spain is in BRICs, wait until he finds out the s is for the s* hole country (his words, not mine) is called South Africa. He has threatened to impose 100% tariffs on BRICS, so AGOA would go out of the window and have a significant impact on agricultural exports and all those cars made in the E Cape. Hopefully, this gets buried under the pile of paper on the Resolute Desk (he is notoriously work-shy and hates reading, so perhaps there is hope.) We just have to worry about those birds that are chirping in his ear. Unfortunately, thanks to relentless bullying at school, the first bro, Elon, is not a fan of RSA. Please, Cyril, keep your head down and fly under the radar for all our sakes.  Interest Rates As much as we’d like to think that the SARB acts independently, any time they have ignored or ‘front-run’ the FED on interest rates it has not ended well. Despite our interest rates coming in a ‘real’ (inflation-adjusted) 4.75% (Repo minus CPI) – the SARB is unlikely to cut again before the US does. For those of you with income-generating portfolios, this is good news. In our client’s portfolios, for example, we have also been able to lock in some of those CPI plus 6% returns by using the Govt 10-year bond. The FED is unlikely to cut interest rates if it feels like inflation might get out of control again. As we have said repeatedly in this newsletter, most of Trump’s ‘plans’ are highly inflationary – The anti-migrant push is already underway (helped by yet another executive order). Interestingly, by defacto trying to abolish parts of the 14th amendment of the US Constitution (birthright citizenship), he has gone even further. Ironically, most of his children, wives, and JD Vance’s children (his wife is an Indian immigrant) would fall foul of this change. For someone who prefers to choose his wives from the immigrant pool, this obsession is odd. Powell (appointed by Trump in his first term) is not phased by the brain-droppings from the Trump camp on interest rates, to quote: I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision. If I disagree, I will let it be known. Trump would not be the first president to put pressure on the Fed. Powell’s mandate ends in 2026, and the process of replacing him will get underway later this year. For now, Powell can’t say much in response. It’s also hard for the Fed to set monetary policy without clarity on what’s coming from the administration. A growth agenda should make it harder to cut rates, but the central bank can’t say that out loud. To quote Vincent Reinhart, chief economist of BNY Wealth and a long-time senior Fed official: It’s a trapeze-artist problem. You don’t leave your platform until your partner has also left their platform. You can’t assume political actions that might change policy until they actually happen, because they might not… A political or cautious Federal Reserve isn’t going to raise its head in DC. Powell is going to keep his head down, but he is only kicking the can down the road and there could be turmoil ahead, especially if inflation starts to climb again or interest rates don’t fall as quickly as Trump would like.  OIL – Trump’s obsession I’m so sorry if this whole podcast is catching you up on Trump’s “plans” but his minions have been busy boys. Trump’s latest howl was to address Saudi Arabia and the rest of the Opec oil cartel as follows: You’ve got to bring it [the oil price] down. With oil prices going down I’ll demand that interest rates drop immediately. And likewise, they should be dropping all over the world. At this point, with Trump, it’s let’s see how much manure we can throw at the wall and what sticks. The US president cannot order a fall in the oil price, which is subject to many forces. and short-term interest rates are set by central banks, and long-term rates by markets. We’re not particularly concerned by this cow-pat that he has lobbed out there, it is unlikely to stick but just makes him look like the loon everyone outside of the US sees, but 50% of the population doesn’t. Messaging like this has ratcheted up economic policy uncertainty but somehow without damaging stocks. Trump 2.0 is very different from Trump 1.0 – And the rest of the world better realise it. When he came in for his first term, the primary concern was the very slow recovery after the Great Recession – that Obama had brought the US back from the brink. Inflation wasn’t really a problem. Trump correctly recognized that a lot of people felt globalization wasn’t working for them and that populism was working for politicians. All the Trump 1.0 policies were inflationary. Now the world is different. It seems obvious to everyone now that tariffs have become a negotiating ploy and perhaps we shouldn’t take him seriously. He talks about it to rally his supporters but is listening to those who caution him about being too aggressive or too pre-emptive. At this point, it might take actual actions rather than words to move markets. Yes, Trump, this time round is more politically savvy, but the US’s trading partners are also more knowledgeable and understand how much of his rhetoric is grandstanding to his base, and how much will happen. Trump’s obsession with Oil prices Much of the macho MAGA subset of the US economy have their egos all tied up with their cars and road trips. An echo of a bygone Model Ford era. Opec cannot set prices, but it does have the power to exert upward and downward pressure by raising or decreasing production. Saudi Arabia is key in this, and despite their friendly disposition toward the US, it’s unlikely to extend as far as losing market share – or tapping into their reserves to bring the price down just because DJT wants it. Bear in mind that US ‘gas’ prices are at about $3 per gallon ($0,8 per litre) – that’s R14 (to our R21) or so a litre. Compared to overall inflation, indeed, it is no higher than two decades ago. During a crash – like we saw in the pandemic it can drop to $1.50 – but should they, and can they?  US oil production has never been higher, thanks largely to the shale revolution, which mostly occurred during the Obama presidency (and which has made overall production less vulnerable to hurricanes in the stretch of water formerly known as the Gulf of Mexico now known as the Gulf of Trump – jk). Trump declared an ‘emergency’ on gas prices? Really? It’s difficult to see an “energy emergency” with supply at a record high (see above). Remember, like most commodities the price of oil trades on the free market. In these newsletters, I usually use Brent Crude as a benchmark for the price of oil. Brent Crude is the benchmark used for the light oil market in Europe, Africa, and the Middle East, originating from oil fields in the North Sea between the Shetland Islands and Norway. West Texas Intermediate (WTI) is the benchmark for the U.S. light oil market and is sourced from U.S. oil fields. West Texas crude is the US equivalent to Brent. At the time of writing this The real-time price of Brent crude oil is at $77.54 per barrel, and the price of WTI crude oil is at $74.34 per barrel. The oil that is imported from Canada (and might be subject to tariffs) is called West Canadian Select (WCS) is a heavy crude oil with higher density and higher sulphur content, requiring more refining and processing. WCS trades at a discount because of restricted pipeline access and the lower quality (Second-class fossils, no doubt). Fun fact, we call crude oil and petroleum fossil fuels because they are mixtures of hydrocarbons that formed from the remains of animals and plants (diatoms) that lived millions of years ago in oceans, lakes, and swamps before dinosaurs roamed the earth. So no, not fossilized dinosaurs. Author: Dawn Ridler  Post Inauguration: The hard work starts now for Trump. But first there was a slew of executive orders, many rescinding what the Democrats under Biden tried to achieve. But now that the Trump Presidency is well underway much of the rhetoric will have to translate into measurable deliverables. Trump is taking over a US economy that is on a strong footing. GDP growth is accelerating, unemployment has reduced, and the market is up. What isn’t there to love about the US today? The one possible snag is inflation. Even if this stays at a higher level, one hopes that it can remain passable for the average American. Since the inauguration, markets have started increasing again and earnings seem to be holding strong. US indices have now started recording positive returns year to date with most indices ending 3% higher. About 42 companies have reported earnings and 83% are beating their estimates. That’s not easy to do! Too few companies have reported to draw any conclusions, but this is certainly encouraging for the market. As I said last week, earnings are going to be the single biggest driver of stock returns in 2025 given the elevated valuations for the market. The below chart from JP Morgan shows the forward P/E of the S&P500. It’s based on market estimates to derive the valuation. The chart juxtaposes today with other times in history when valuation was similar to today (perhaps not 2007 which was the start of the Great Financial Crisis). The conclusion is that from today’s market level, the risks of owning shares need to be carefully weighed up. Bear though in mind that each of the below sell-downs was created by an event. The 2000 high preceded the 9/11 attacks whereas the 2020 high coincided with the Covid crisis. Markets don’t just sell down .. they need a catalyst.  So that brings us to today’s valuation. Yes, it’s stretched as most analysts would agree but earnings seem to be holding. And then you have a Republican party which now controls the House, Senate and the Presidency. That gives policymakers a unified voice which is important for markets. But also bear in mind that this dispensation is very business-friendly. The efficiencies that stem from this are perhaps not fully priced into markets. So for now, 2025 may just be another positive year but not necessarily a return-laden year such as 2024. For now…. I continue to be on catalyst-watch. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at 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 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 R19.31 (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 at $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 $104559 ($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: New Year’s resolutions over? Try a Wealth Bibgo Card instead.NEW Wills and Estate Planning (comprehensive 3 in one post) NEW 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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