Finance Minister Enoch Godongwana delivered the National Budget Speech on 12 March, after it was postponed on 19 February due to disagreements within the Government of National Unity (GNU) over a proposed 2% VAT hike. The final Budget presented was not significantly different from the February version, which has sparked both positive and negative reactions.

The good – Fiscal consolidation

The Budget demonstrates the National Treasury’s commitment to fiscal consolidation and debt stabilisation. Key figures highlight a plan to stabilise debt, with debt-to-GDP ratio expected to peak at 76.2% in 2025/26. The primary budget is expected to remain in surplus and continue rising over the medium term. The budget deficit is projected to fall to 3.3% by 2027/28, down from just under 5% currently. There are no new borrowing increases to finance the increased spending, reflecting a more prudent approach to fiscal management.

 The bad – Increased revenues via taxes

To fund additional spending, the government has chosen to increase revenues through taxes. While the February proposal suggested a 2% hike in VAT, the final budget introduced a more gradual approach, with a 0.5% VAT increase to be implemented on 1 May this year, followed by another 0.5% increase next year. This will bring VAT up from 15% to 16%.

The Budget has also not adjusted tax brackets for inflation. The 0.5% VAT hike and the non-adjustment of tax brackets will likely put additional strain on consumers, who will feel the pinch in their pockets. We are not convinced that the Budget is particularly pro-growth.

What about spending?

There is a reduction in expenditure compared to the February version, particularly in frontline services like Home Affairs, social grants (although the growth remains above CPI), and contingency reserves. Spending on infrastructure has been maintained, while spending on public sector wages and the SRD grant has also remained in place. No bailout for SOEs. The Budget also allocated more funds towards SARS to improve revenue generation capabilities. While the current spending programme is broad-based and includes much-needed infrastructure and service increases, we believe there is scope to cut unproductive, wasteful spending further.

 The ugly – GNU uncertainty

The Budget now faces the challenge of approval in Parliament, where it needs to secure more than 50%. Any amendments must be made within the next three weeks. The ANC, with its 40% share, will likely struggle to secure the necessary votes without amendments or concessions. We see two possible options for moving forward:

• The ANC could seek to get opposition parties like the EFF and MK on board, replacing the VAT hike with an increase in corporate income tax (CIT) and wealth taxes. We view this as an unlikely scenario.
• ANC and the DA could agree on a path forward, with the DA accepting the 0.5% VAT increase this year but not next year or/and the ANC may need to make non-fiscal concessions to the DA or/and agree to a more aggressive spending review to cut unnecessary expenditure.

 Impact on South African Reserve Bank Monetary Policy

The 0.5% VAT increase will push CPI up by 0.2% both this year and next. Therefore, average inflation will be around 4% in 2025 but potentially above 4.5% next year. This increase in inflation, combined with the ongoing uncertainty surrounding the GNU and the Budget, is likely to impact monetary policy decisions. SARB is unlikely to cut interest rates in its upcoming meeting on 20 March.

 A mixed outlook for SA assets

Overall, this is not a particularly strong pro-growth budget. The tax hikes and inflationary pressures on consumers suggest that their wallets will be squeezed, which is not great for equities. However, the continued commitment to fiscal consolidation and debt stabilisation is more positive for bondholders.

Global developments: Fading US exceptionalism

The theme of US Exceptionalism, which dominated investment strategies, is fading. The US economy and equities were strong over the last few years. Coming into 2025, earnings & economic expectations have been high, with elevated valuations and heavy investor positioning in US markets. However, recent months have shown softer economic data and increased policy uncertainty.

The surge in policy uncertainty is predominately driven by tariff threats and potential government spending cuts by the Department of Government Efficiency (DOGE). These policies have created uncertainty amongst both corporates and consumers. Corporates have become unwilling to invest, and consumers have become unwilling to consume.

This uncertainty has triggered a market correction. The S&P 500 has dropped nearly 10% since late February, and the Nasdaq is down more than 10%. The “Magnificent 7” tech stocks are nearing bear market territory, with a 16% drop from the December 2024 highs.

Source: Bloomberg, Fairtree

Meanwhile, markets outside the US have performed better, with the MSCI Emerging Markets index down 3%, the MSCI World down 7%, the MSCI China index basically flat, and the MSCI South Africa index down by 2%.

Opportunities in Europe, China, and Japan

As US Exceptionalism wanes, we see opportunities elsewhere. In Europe, the German election has led to a growing willingness to use fiscal spending to boost the economy, including a EUR500 billion infrastructure package, which amounts to 11% of Germany’s GDP. The country is also considering a reform of its debt brake, which could lead to EUR150 billion in additional defence spending. These fiscal measures could increase Germany’s GDP by 2% from its current levels by 2027.

A ceasefire between Ukraine and Russia is looking increasingly likely, which would reduce energy prices, lower inflation, and provide new investment opportunities. The European Central Bank (ECB) is expected to continue cutting rates in the short term.

In China, the National People’s Congress (NPC) has set a growth target of 5% for the year and increased the budget deficit from 3% to 4% of GDP to support domestic growth. The government is focusing on stabilising vulnerable sectors, with substantial bond issuance aimed at supporting the property sector and domestic consumption through subsidies.

In Japan, signs of reflation are growing, with the economy showing positive signs after decades of deflation.

Shifting investment trends

Investors are increasingly diversifying away from the US, moving capital to more attractive opportunities elsewhere. With the current market correction showing instability, the outlook remains uncertain. We believe we need three catalysts to address the current market correction.

First, a credible policy response. The US Federal Reserve’s policy response will be crucial, but high inflation prevents significant rate cuts soon. Tariff and DOGE spending certainty will also help, but it is unlikely over the short term.

Secondly, macro data needs to improve. US activity indicators must improve, and inflationary pressures need to ease.

Thirdly, the technical needs to improve. While valuations have improved, they remain elevated, particularly for large tech stocks. Investor positioning is still adjusting, and this process is ongoing.

Conclusion: More downside potential

Given the current economic uncertainties and market conditions, there is still potential for further downside in the markets. The US has lost some of its exceptionalism while other global markets show more promise. For South African investors, the mixed budget and the broader global trends will continue to create challenges and opportunities.

Introduction

Q1 2025 reminded us that the well-known saying “the only constant is change” remains as relevant today as ever before. In a quarter dominated by trade tariffs; new entrants in the artificial intelligence (AI) race; US policy uncertainty; a falling US 10-year Treasury yield and a weaker dollar, non-US indices bucked the trend of US domination with Chinese (Hang Seng +19.4%), European (EuroStoxx 600 +9.9%), UK (FTSE 100 +8.2%) and South African (JSE All Share +8.5%) indices delivering strong returns (all in USD).

US domination came under pressure in Q1 2025, with the S&P500 and NASDAQ 100 declining -4.6% and -10.4% respectively (in USD). Information technology and consumer discretionary sectors lead the indices lower. News out of China that DeepSeek had developed an artificial intelligence (AI) model comparable to market leaders (but at a fraction of the cost) caused investors to reassess expectations around AI and US domination in the field. The “Magnificent Seven” which has enjoyed the AI themed tailwind in recent years were subsequently put under pressure by this news. Trade tariffs, another key theme of Q1 and almost certainly for quarters (if not years) to come, created further uncertainty in markets. President Trump announced tariffs on certain countries, notably Mexico and Canada. As the quarter came to a close, investors were awaiting Trump’s comments on 2 April, dubbed “Liberation Day”, for further clarity on the way forward on the global tariff landscape. The Federal Reserve kept interest rates on hold at 4.25-4.50% during the quarter.

Chinese equities rose sharply during the quarter on the back of domestic government support measures (interest rate cuts; support for the troubled property sector and liquidity injections) which helped to improve investor sentiment. Advances in artificial intelligence (Ai) by Chinese companies (e.g. DeepSeek) have also led investors to reevaluate China as a leader in the technology sector with strong growth potential.

Domestically, the South African Reserve Bank held the repo rate at 7.50% in March, maintaining a cautious stance after cutting rates in January. Tensions in the GNU, sparked by a dispute regarding a VAT hike, led to the postponement of the national budget speech. Despite the growing tensions with the US, the South African rand strengthened by c.3% against the Dollar during the quarter. Despite the macro and social economic challenges, the country faces, South African equities delivered strong returns (JSE All Share +5.9% in ZAR) which was spurred on by a surge in precious metal prices.

In summary, the Fairtree Wild Fig Multi Strategy FR QIHF, “Wild Fig”, our flagship multi-strategy balanced hedge fund had a relatively lacklustre quarter, delivering (-2.5%) in Q1 2025. On a rolling 12-month view, the Fund has delivered a strong double-digit return (19.3%) after fees. The Fund remains true to its investment objective of compounding clients’ capital over the long term. We thank you for entrusting us as stewards of your capital.

Wild Fig Multi Strategy

Portfolio Management Team

Quarterly Performance: Wild Fig FR Multi Strategy QIHF

Source: Fairtree, Bloomberg.

A lacklustre first quarter of 2025 was attributable to positioning in Fixed Income (more specifically our SA Fundamental strategy) and Commodities, whilst positioning in Equities marginally offset the drawdown.

Although the SARB has been reluctant to cut rates on the back of global policy uncertainty (trade war) and the impact that potential tariffs could have on inflation, the Fixed Income Fundamental (SA) strategy continues to hold the view that there aren’t enough rate cuts currently being priced in the market. The view is supported by current and forecasted inflation being in the lower end of the SARB’s target range; real rates remaining high; disappointing local economic growth and the rand remaining relatively resilient.

Within the Commodities strategy, some pairs have moved into multi-decade extreme levels of dislocation. Despite a negative return for the quarter, the team has conviction that their positioning will play out positively over time. As a reminder, the agricultural and soft commodity strategy remains one of the lowest heartbeat strategies (from a,volatility standpoint) within the Wild Fig construct.

The “Holy Grail” of Uncorrelated Returns

In the years following the GFC, highly accommodative global monetary policies resulted in increased availability of money supply and low-interest rates, increasing global liquidity and driving equity markets higher. As a result, hedge funds lost popularity as high beta and growth outperformed most alternatives.

Figure 1: Rising equity indexes driven in part by rising liquidity

This market backdrop led investors to question the need for hedge fund exposure altogether, often culminating in the future viability of the asset class being questioned. This however changed dramatically with the advent of the so-called, and well reported, “Sea Change “, popularised by Howard Marks in 2022 during a time when speculative and growth expectations subsided. Stocks fell sharply on the back of rising inflation and subsequent restrictive monetary policy. However, as the traditional safe-haven correlation between stocks and bonds broke down, a rare dynamic occurring when a slowdown in growth is accompanied by rising inflation and not a recession, many hedge funds outperformed traditional “60/40” balanced portfolios.

Figure 2: Traditional “Balanced” 60/40 portfolio and sub-allocation returns

The 2022 market environment and subsequent investor (or client) experience helped reinforce the benefit of hedge fund investing as a strategy that offers positive excess returns with little co-movement to major asset classes.

The main benefit of allocating to a hedge fund has historically been an argument for excess return and downside protection (i.e. hedging). However, a positive excess return argument is only one half of the benefit. The real benefit lies in the uncorrelated nature of the asset class returns when combined with a traditional portfolio which ultimately adds a layer of additional excess return in addition to downside protection. It’s this benefit, and this benefit alone, that make hedge funds a true “free lunch” in not only diversifying a portfolio but also differentiating it.

Figure 3 reinforces both the evergreen case for hedge funds and their timely appeal in the current investing climate. In a hypothetical exercise based on historical equity and fixed income performance, the heatmap shows that a strategy offering classic hedge fund returns would warrant a material allocation, even if it were expected to deliver a modest positive Sharpe Ratio (a measure of excess return for each additional unit of risk). In a climate of correlated stock and bond returns (as we observed in recent years as correlations converge), the optimal allocation grows larger because the hedge fund’s diversification benefit increases.

Figure 3: The benefits of hedge funds

Source: Fairtree. For illustrative purposes only. Assumptions: equity and bond excess returns based on historical averages, hedge fund volatility set at 8%, hedge funds assumed to be uncorrelated to both stocks and bonds.

To deliver these ideal attributes, it makes sense to diversify across several hedge fund strategies that have distinct performance drivers which produce largely uncorrelated return streams. In addition to greater capacity, benefits include reduced volatility; less lumpy payoffs and smaller drawdowns which improve expected risk-adjusted performance (as long as adding incremental strategies is not overly dilutive to expected returns).

The left panel of Figure 4 below shows that aggregating even a small number of sub-strategies achieves significant diversification benefits—if they are truly differentiated. The right panel illustrates the benefit in another way, showing that a small set of distinct hedge fund strategies with individually modest Sharpe Ratios can be combined to generate much stronger risk-adjusted performance. It is not the number of strategies perse that add portfolio diversification benefits, but the additional layer of correlations between them. If each strategy has an additive excess return (Sharpe), where the incremental addition of strategies does not dilute expected returns, this translates into significant improvements in expected risk-adjusted performance.

Figure 4: Portfolio benefits of uncorrelated strategies

Source: Fairtree. For illustrative purposes only.

The multi-manager structure can be viewed as a pragmatic compromise in aggregating siloed investment processes. It preserves decentralized decision making by specialist sub-strategy, or allocation, teams with respect to trade analysis, sizing and timing, while generating benefits from consolidation in other parts of the investment process.

The Holy Grail – Uncorrelated Diversification

Ray Dalio famously quoted that the “Holy Grail” of investing is achieved when you “can reduce your risk without reducing your return”. Dalio uses this phrase to describe the ideal investment strategy, centred around the principles of diversification. He takes it one step further by asserting that diversification isn’t enough, but rather a focus on distinctly different assets, as he advocates for investing in a mix of assets that have a low correlation between them.

Figure 5: Diversification benefits of uncorrelated strategies

Source: Fairtree, Ray Dalio, Bridgewater

In Figure 5 above, he illustrates this point by plotting different risky portfolios with static expected returns. As you add to the number of assets (x-axes), the result is a declining annual portfolio standard deviation (a measure of risk, on the y-axes). However, when considering the correlation between the assets, he illustrates through the multi- coloured lines of different asset correlations that as the correlation decreases between assets, how that significantly shifts the risk profile down whilst keeping the returns the same – thereby significantly increasing the risk-adjusted return (or Sharpe ratio). Ultimately, he explains that the probability of losing money diminishes as correlation between holdings decreases. Also worth noting how the incremental diversification benefit diminishes roughly when reaching 20 assets, irrespective of the underlying correlation of the asset returns.

However, from a portfolio construction theory perspective, and implicitly of utmost importance to allocators, this dynamic does not only produce a risk-diminishing benefit but rather forms the essential building blocks to generating long-term returns, as the oscillating underlying strategy return series’ compound returns over time. Using a Monte Carlo simulation, we can test this statistically to help explain the benefits of a multi-strategy approach. A Monte-Carlo simulation is a computational probability analysis tool, that models the most likely probability of an outcome based on repeated random sampling. In practice, a Monte-Carlo simulation model repeatedly runs (millions of) sample tests using a set of variables (but using different random combination thereof), to generate simulations of possible outcomes to essentially guide towards the most likely outcome. In the context of investing, it allows you to model a portfolio’s potential return paths under a wide set of scenarios whilst incorporating volatility; correlation; expected returns amongst other inputs. The simulation thereby quantifies the likelihood of millions of various combinations resulting in outcomes to ultimately reach the most likely outcome.

A simple real-life example of a Monte Carlo simulation can be seen in estimating pizza delivery times. Rather than assuming a fixed delivery time, you can simulate a wide range of possible scenarios by accounting for variables like traffic conditions; cooking time and delivery routes etc.—each of which can vary randomly. By running millions of simulations that randomly combine these factors, the model generates a distribution of possible outcomes and find that in 84% of cases the pizza is delivered in under 30min vs 16% of the times it’s late. This allows you to estimate, for example, the probability that your pizza arrives in under 30 minutes, rather than relying on a single average guess.

Figure 6 below is a Monte Carlo simulation of a portfolio returns over time, using the following inputs:

– a single strategy (Strategies = 1),

– generating returns at a Sharpe ratio of 0.5 (Sharpe = 0.5), meaning for every 1 unit of risk, or volatility, you’re earning 0.5 units of excess return.

– a portfolio generating expected returns at 14% annualised volatility (Vol = 14%) which is a measure of the spread of the distribution of return series.

– a time horizon of 20 years (Time =20).

The result: a portfolio generating a modest annual return of 7.42% over 20 years, albeit with reasonable levels of volatility, leading to a portfolio starting value of 100 compounding to 418.51 over the period.

Figure 6: Single strategy portfolio

(Strategies = 1, Sharpe = 0.5, Vol = 14%, Time =20)

Source: Fairtree, Winton Group.

We can run the same simulation, but as opposed to a single outcome based on a single asset return series, we duplicate the series for 20 random portfolios, each with exactly the same underlying input variables. We can then combine these multiple series into a single portfolio, i.e., creating a multi-strategy fund that consists of an equal weighting to 20 underlying strategies and set a correlation coefficient of 0.4 between the return series (coincidentally, similar to the Wild Fig multi-strategy sub-strategies’ correlation of underlying returns).

The results are as per below: each individual series performs as expected over time, generating a similar return series albeit at different levels of probable success, but notably, the multi-strategy portfolio outperforms all the underlying individual series, increasing portfolio annualised return to 11.80%, at a Sharpe ratio of 0.80.

As the uncorrelated combination of the underlying return series add differentiated excess returns, the multi-strategy captures the oscillating returns on an equal basis, smoothing out the return path over time (lowering the drawdowns) and capturing incremental out performance, which results in an absolute outperformance versus all other strategies. A portfolio with a starting value of 100 would compound to 930.76 over the period.

Figure 7: Multi-strategy portfolio

(Strategies = 20, Sharpe = 0.5, Vol = 14%, Time =20, Corr = 0.4)

Source: Fairtree, Winton Group.

A common investor misconception is that one can improve returns by lowering the volatility of returns, where volatility is seen as a synonym for risk and clearly when one lowers risk the ultimate return should improve.

However, when lowering the volatility, the shape of the return series remains the same (as seen on the below Figure 8 graph) as volatility does not change the direction of returns, but rather the spread at which they’re generated. Interestingly though, even though the shape remains the same the investor isn’t rewarded for the lower volatility experience, quite the opposite. As the portfolio Sharpe remains the same (0.80), but annualised returns decline to 6.58%, a portfolio with a begin value of 100 would compound to 357.7 over the 20-year period.

Figure 8: Lower volatility multi-strategy portfolio

(Strategies = 20, Sharpe = 0.5, Vol = 8%, Time =20, Corr = 0.4)

Source: Fairtree, Winton Group.

When turning the dial on the underlying return series’ correlation however, the results are staggering. By removing any correlation (i.e., they have complete uncorrelated returns) the benefits are clear: the portfolio achieves a Sharpe of 2.21, generating an annual return of 36.27% over 20 years, or phrased differently, a starting value of 100 compounds to 48,753.42. As all the strategies are uncorrelated but running an annualised volatility of 14% (taking risk), these risks interplay over time; negating individual downside losses per individual strategy when losses occur and generating additive excess returns.

Figure 9: Uncorrelated multi-strategy portfolio

(Strategies = 20, Sharpe = 0.5, Vol = 14%, Time =20, Corr = 0.001)

Source: Fairtree, Winton Group.

Conclusion

The central belief within the Wild Fig Multi Strategy lies in the pursuit of the so called “holy grail” of investing whereby uncorrelated asset classes and subsequent sub-strategies are combined into a single-entry point for investors with the goal of delivering absolute returns each year irrespective of market conditions without taking excessive risk.

The Wild Fig multi-strategy range of funds is built on exactly this notion, with a focus on skilled internal, best in class Fairtree underlying strategies. The Wild Fig Portfolio Management team sets out to find multiple uncorrelated return series and constantly track and monitor the underlying correlations as: macro conditions change; strategies mature, and they aspire to take advantage of current investment opportunities available to them.

This uncorrelated blend of the sub-strategy allocations has resulted in the fund achieving its target objective of “generating absolute returns, whilst exhibiting JSE All Share volatility”, achieving a return of 20.8% since inception over c.15 years ago – or a portfolio with a begin value of 100 would have compounded to 1,590. Over the same period, the JSE All Share has delivered a return of 11.7%.

Once again, thank you for your support and your trust as custodians of your capital.

Please do not hesitate to reach out with any questions or comments.

Wild Fig FR Multi Strategy QIHF cumulative performance

By Ashin Daya, Equity Analyst

Outperformance of the USA

The S&P 500 has enjoyed a stellar decade of growth, compounding at 12% in US dollars. In comparison, the MSCI ACWI (All Country World Index), excluding the USA, has compounded at only 5% over the same period. The dominance of the US market is evident in the top 10 constituents in MSCI ACWI, all of which are American companies, and they now make up 65% of the MSCI ACWI. Given this, it is crucial for investors to assess whether US stocks are justifiably expensive or if valuation concerns are overstated.

For years, the consensus has been that the US market is expensive, consistently trading at a premium on various valuation metrics such as price/earnings, price/sales, dividend yield, and price/book. However, such a conclusion may be overly simplistic.

The USA’s growth and return advantage

US companies have delivered stronger earnings growth than other geographies. This has been driven by a combination of easy monetary and fiscal conditions, healthy demographics, a venture capital industry, and a regulatory environment that fosters entrepreneurial innovation.

The USA’s growth and return advantage

US companies have consistently delivered superior returns compared to their developed market peers, benefiting from higher profitability and better capital efficiency. While European and Japanese firms often struggle with sluggish economic growth and structural inefficiencies, US corporations have leveraged technology, innovation and flexible labour markets to sustain higher margins and shareholder returns.

The cost of capital has changed

When the cost of capital was cheap during the early 2010s, it allowed companies such as Meta to purchase businesses like Instagram and WhatsApp, thereby strengthening their eco-system and deepening their moats and enhancing their advertising monetisation potential. In this low-rate environment, investors could justify paying higher multiples for these high-growth companies.

One of the biggest shifts over the last few years has been the increase in US bond yields. With US inflation remaining sticky and bond yields above 4%, the cost of capital has increased, making equities less attractive relative to bonds versus the previous decade.

One of the biggest shifts over the last few years has been the increase in US bond yields

Investors must also weigh valuation multiples against a broader set of fundamental factors, including growth prospects, return profiles, changing capital intensity, and sustainability of competitive advantages in a fast-changing environment.

The BATMMAAN effect

A significant portion of the US market’s strength comes from a handful of dominant technology companies, often referred to as the BATMMAAN stocks—Broadcom, Apple, Tesla, Microsoft, Meta, Amazon, Alphabet, and Nvidia. These companies have reshaped industries, with their high-margin, capital-light business models enabling them to generate substantial cash flows and reinvest in growth. Unlike traditional sectors such as Financials, Materials, and Industrials, which require continuous reinvestment, these tech giants enjoy pricing power, network effects, and recurring revenue streams, justifying their premium valuations.

Interestingly, history shows that dominant companies tend to remain dominant for longer than many investors expect. Despite their superior business models and growth outlook, most of these companies have derated over the last couple of years and now trade at parity versus the S&P 500.

Closing thoughts

While the US stock market may appear expensive on a headline basis, its premium valuation is backed by structural advantages, superior earnings growth and returns, and sector composition differences. The rise of the BATMMAAN companies has further reinforced this trend. As history has shown, valuation alone is rarely a sufficient reason to avoid an investment—growth, quality and competitive advantages must also be factored into the equation.

Investors should, therefore, tread carefully before dismissing the US market as merely “too expensive”. Rising uncertainty from tariffs and broader geopolitical tensions, as well as the fast-changing technological landscape, means that multiples will probably compress and that you must be selective with your exposure.