But why did Trump pause and reverse this policy? We believe that he was for ultimately forced by the market. And given the fact that more than 50 countries has come out to say they want to renegotiate terms, he could use that as some sort of a victory. Just before his announcement, the market was down in The US by about 20%, so close to bear market territory as the market was starting to price in some form of recession. And most concerning and interestingly was that bond yields were actually rising and the US dollar were weakening while you had the sell off in The US equity market.

Typically, in a big sell off, you would get bonds and the US dollar to act as a safe haven. So you would see bond yields fall and the US dollar rise. So why did that not happen this time around? We believe there are a few reasons for that, and that has got some implications for The US. First of all, the bond seller that we saw was mostly mostly result of some forced selling as hedge funds in particular had to raise some cash, but also we believe that there’s some foreign reserve managers out there that was selling US treasuries, in particular the Chinese or the Japanese.

So reserve managers typically buys treasuries or US dollar assets. But when you see some of that trust being broken and The US is the ultimate cause of policy uncertainty, you would expect that some of the decisions taken by these reserve managers is to diversify away from US assets into other asset classes. So in this environment, it’s no coincidence that the gold did well and the euro actually appreciated very strongly while we had this risk of event. So one could say that, yes, US exceptionalism has indeed peaked. Looking forward, we believe there’s still a lot of uncertainty out there.

We are still faced with the fact that these tariffs could be implemented in the next ninety days. The negative impact of the 10% across the board still have to be felt by the market, and there’s threats of new tariffs, tariffs in particular on semiconductors as well as on pharma. And then we still have to see the fallout of all the retaliatory tariffs and responses from different countries, including China. So in this environment, we think that the biggest macro risk remains stagflation, and the Fed and Powell does agree with us. If you listen to what Powell has recently said, he’s in no hurry to cut interest rates.

There’s too much uncertainty still out there. If you think about the inflation dynamics, yes, inflation at the moment in The US is still coming down, but looking forward, we believe that the tariff rate the effective tariff rate, which has now risen by between 15 to 20%, will ultimately push CPI to well above 3% potentially. And we still think that we’ll be faced with a US recession. So in this environment, we think that the Fed will wait until US economic data, in particular labor data, starts to weaken quite significantly before the act. And then they ultimately may act and cut more than the market is pricing in at this stage, and the market is pricing in about four cuts over the next twelve months.

The country hit the hardest by the trade war thus far is China. They’re facing a 45% tariff rate at the moment because they initially retaliated against The US. But But unlike The US, China has got some fiscal and monetary scope to ease policy while in The US there are some fiscal and inflation dynamics that may keep The US from easing immediately. Also, if we look at the data, China is doing fairly well. They’re growing at 5.4% in the first quarter of this year and year over year, retail sales, industrial production, and fixed asset investment is actually doing fine.

The exports has also remained quite strong given the fact that they front loaded a lot of the exports in the run up to these tariffs. So looking forward, we still think that China has got the ability to absorb some of the pain via currency depreciation, policy easing, which they can bring in, and also looking for new markets around the world which they’re actively doing. We ultimately think that China has got the ability to take short term pain to gain long term strategic advantage and that ultimately may force The US to some sort of a deal with the Chinese in the future For other emerging markets, we also think that the turmoil that we’re seeing at the moment has provided some benefits in the form of lower oil prices as the market is pricing in lower growth, but also opaque cuts are coming through. That ultimately may mean that we will see lower inflation, some ease for the consumer, and it may provide some scope for central banks to cut interest rates. Also, the weaker dollar is positive for commodities, which many emerging markets are producing and exporting.

So for countries like South Africa, where the SARP has been very cautious in thinking or alluding to any monetary policy easing, we think ultimately there’s still scope and room for the SARP to cut rates in the future. Remember, volatility breeds opportunity. Stay focused on the macro. Thanks for watching.

I have with me Cornelia Ziman and Jacques, welcome guys, lovely to have you here.

Thank you.

So Cornelius, 2024 has been quite an interesting year for global politics with almost 50% of the world going to the polls, including the highly anticipated US election. So with the outcome of President Donald Trump being elected, how does this fare for our portfolios moving forward?

Yes, as we saw Donald Trump’s probability of winning the election rise, we saw the dollar strengthening. We saw the US market continuing to outperform the rest of the world. Interestingly, the US has now outperformed the rest of the world by three, 100% since 2010. We also saw cyclical start outperforming defensive as Trump is seen as a pro growth candidate. Bond yields also rose, Trump ran on a campaign to deregulate aggressively. He also wants to impose tariffs and put America first, which will drive more investment, So he’s definitely seen as a market friendly and economic friendly candidate.

So we’ve seen quite an interesting phenomenon over the past few months where bond yields have risen almost 100 books despite the Fed cutting rates, what does this mean and what can we read into this?

So the bond yields rose due to the growth that’ll be higher than expected, as we’ve discussed, as well as the risk that Trump poses for inflation with his tariff policies, a clamp down on immigration. We also saw the price of oil rising, and these are actually headwinds for the equity market. If we think about the equity market in the US, 40% of the earnings are derived from outside the US, so the strong dollar is a headwind for translation of these profits as well As for the profit margins, high inflation and high discount rates.

Also a bit of a toxic combination for equity, so it’s been very interesting if you look at the theatre composite indicator of these three versus the level of the equity market dislocates so dramatically over the last year.

So I’d like to spend some time talking about how the market is run and how valuations have been quite stretched. We’ve seen the S&P 500 trading at a forward price to earnings multiple of 22 times in comparison to its 10 year average of around 17 times. So as we can see in the graph, the market is quite concentrated with the top ten stocks making up almost 40% of the S&P 500 market cap. So tell us what this means in comparison to the past where it’s made-up only 27% at its peakinthe.com bubble.

So the market rally has been very narrow and it’s been driven by the Magnificent 7, which is just a collective term for the most successful companies over the past decade. I think it’s important to remember that these businesses are very different business models and drivers from autos to online retail, hardware and software businesses and advertising plays. So it’s difficult to make a blanket statement, but what we do know is that excluding NVIDIA, these businesses are actually grown earnings by more than 30%, but they’ve de rated, which is the opposite of what happened in the S&P 493 where they’ve shown very little earnings growth, but they’ve actually enjoyed a 15% rewriting.

So looking forward, we think the market breath will improve, Trump is pro growth, which should be good for the US economy, and we’re really starting to see early signs of that coming through with the big U.S banks reporting earnings last week. So reporting very good earnings and also having very positive outlook statements.

So let’s zoom out a bit and discuss what we’ve seen around the world in 2024, so the divergent has been quite extreme across markets. The European index was up low single digits, but that kind of adds the fact that France was down more than 5 on debt concerns and the German market was up more than 10% despite the collapse of the coalition government. With an emerging markets, we again saw very extreme moves. Brazil was down close to 30% where the weakening currency is driving inflation fears and South Korea was down 20% following the impeachment of both the president and then the new acting president.

Yes, the Chinese performance has been quite surprising, what do you make of this?

I think it’s important to remember the big picture, Chinese valuations were very depressed at the start of last year. The market is down more than 50% from the highs it’s set in 2021. And with investing, the delta of the facts is very important. So on the economic side, we saw a broad based announcement of stimulus announcements in September and a commitment by the government to increase the quantum of stimulus as needed. And we already saw the green shoots coming through.

When we look at the retail sales for the categories where there are stimulating with trading policies like equipment. In terms of sentiment, it’s also quite depressed. A lot of people calling China uninvestable. And we saw the positive reaction when Trump just tweeted last week about his positive interaction with President Xi. So we think on the economic side and the sentiment side, the deltas are looking favorable and that led to the rally in the second-half of last year.

And we’re quite positive about the prospects for 2025 S given the consumer facing stimulus measures that they’ve put in place, how have we positioned our portfolios to take advantage of this? 

So we think you need to be very selective when you’re investing into China. But an area where we are very positive on is on the consumer facing businesses, specifically the online retail players being Bandodo, JD, Alibaba and Tencent. I think these businesses have continued to grow margins as they’ve as they’ve gone through Jacobs and they’ve now built up more than 30% of their market caps in cash.

And importantly, they’re returning this cash to shareholders in the form of dividends and increased buybacks. And despite all of this positive news, they’ve D rated from parity price earnings ratios to the NASDAQ a few years ago to close to 10 times forward multiples at the moment.

Sure, Cornelius, thank you for your time today, It’s been great having you with me. We look forward to having you on many more sessions to come. Thank you.

Feel free to reach out with any topics you would like us to discuss, or any questions you may have for us in future.