Dear Investor
General Market Overview
From a geopolitical perspective, the United States (US) election held on the 5th of November was important for market participants to enable them to forecast the likely policy stance from the US over the next four years. The US legislative government is divided into the House of Representatives (the House) and the Senate. The House comprises 435 members, and states with larger populations have more representatives than smaller states. The term for the House is two years, and in presidential election years, the US voting public also selects candidates from their state to represent them in the House.
The Senate consists of 100 members who serve a six-year term. The elections for those seats are staggered, so about a third of the seats are up for re-election every two years. The primary function of the Senate is to approve international treaties negotiated by the president, confirm presidential nominations of judges, cabinet members and other key officials, conduct impeachment trials and share legislative responsibilities with the House but with unique powers like the ability to filibuster to block legislation through delay tactics.
In a general election year, US voters select the president, the candidates from their state to represent them in the House and, if applicable, candidates from their state to represent them in the Senate. Therefore, there are three sets of results to consider. In the election of the US president, Donald Trump gained just under 78 million votes to just over 75 million for Kamala Harris; Republicans also secured a majority in the House by a margin of one seat and in the 34 seats voted from in the Senate, Republicans gained four seats to gain a Senate majority. The election results are perhaps closer in number than many might expect, with a 3 million vote difference out of 153 million, which represents a 2% difference. It’s worth remembering that the difference will likely always be at the margin in a two-party system, particularly when evaluating the presidential “popular” vote.
Filibustering is a strange concept; as there is no strict time limit on how long senators can speak about an issue, individuals or groups can “hold the floor” for long periods to delay or prevent a bill from coming to a final vote.
[1] Filibustering is a strange concept; as there is no strict time limit on how long senators can speak about an issue, individuals or groups can “hold the floor” for long periods to delay or prevent a bill from coming to a final vote.
As there will be House and Senate elections two years from now, there is no guarantee that the Republicans will keep their majority in both branches of government for the entire term of the second Trump presidency. When Trump was elected in 2016, Republicans had initial control of both the House and the Senate, but in the 2018 mid-term elections, Republicans lost the House while expanding control of the Senate. A divided US Congress does pose potential legislative challenges and gridlocks and can change the tone of US policy.
One of the key policy features of the 2016 Trump presidency was a US-China trade war. Trump outlined plans for new tariffs during his presidential campaign if elected to a second term. These proposals include a 200% tariff on automobiles imported from Mexico, a tariff exceeding 60% on goods from China, and a general 10% to 20% tariff on all foreign-made products. These tariffs are expected to be a focus within the first 100 days of a second term and may be implemented without congressional approval or negotiation.
China currently enjoys Most Favoured Nation (MGN) status and was granted Permanent Most Favoured Nation (PNRT) status in October 2000 when Bill Clinton signed the US-China Relations Act, which was a crucial step to China entering the World Trade Organisation. An MFN designation is a principle in international trade under which a country agrees to provide another country with the same favourable trade terms (like low tariffs) it offers to any other trading partner.
In addition to tariff increases, the incoming Trump administration has also proposed revoking China’s MFN status. Removing this designation would trigger import duties on products originating from China that are ten times higher than imports from other countries. Currently, the only countries subject to this level of import duty are Belarus, Cuba, North Korea and Russia, which is a fairly illustrious group. In addition to tariffs on goods, there would also be heightened due diligence and scrutiny on foreign investments in US businesses, limiting Chinese investment in domestic operations.
An interesting feature of current US trade (imports) is the already (pre-Trump presidency) fall in imports from China and a notable uptick in imports from Mexico. When the profile of Chinese exports to Mexico is examined, a sharp rise in all categories of goods is seen. Since 2020, China’s Foreign Direct Investment (FDI) in Mexico has increased more than it did throughout the whole of the 2010s, and there is evidence to suggest that Mexico is being used as a layover for Chinese goods en route to the US to avoid US-China tariffs.
As such, the incoming Trump administration will likely have a material impact on global trade, and there will undoubtedly be several “secondary effects” from a reshuffling of international trade status. The other critical part of the global economy where a party change can have an impact is the US Federal Reserve (the Fed). Presidents do not have the authority to remove the Fed chairman, but Jerome Powell’s tenure as chair ends in May 2026. Powell was appointed as a Federal Reserve governor by Barack Obama but was elevated to chair position during Trump’s first presidential term. Powell has shown himself to adhere strictly to the tradition of Fed independence, and it will be interesting (and closely watched) to see and anticipate the characteristics of the new chair selection in two years.
General Conclusion
Significant political and trade dynamics mark the global economic and geopolitical landscape following the recent US election. The results saw Donald Trump winning the presidency and Republicans taking control of the House and the Senate.
A key focus is potentially reshaping international trade relations, particularly with China. As stated, the incoming administration has proposed aggressive trade policies, including substantial tariffs on imports from China and Mexico and the potential revocation of China’s MFN status. The re-election of Donald Trump signifies a pivot towards economic isolationism. Such policies, aimed at reshuffling international trade dynamics, may inadvertently provide a strategic opening for China to deepen its trade relationships with other nations. By strengthening economic ties globally, China could not only counterbalance US tariffs but also solidify its role as a central player in international trade. This isolationist approach risks diminishing US influence while empowering China to leverage its growing economic and diplomatic networks.
Monetary policy continues to be a critical factor, with central banks globally showing an increasing tendency towards accommodative stances.
Given the interconnected nature of global trade and monetary policies, we may have a period of potential volatility as the market digests the potential significant structural changes in international economic relationships.
Rand Overview
Over the last quarter, the Rand has been slightly weaker against the US Dollar and 4% stronger, as measured over the previous 12 months. Since the US election, the Rand has been one of the more heavily impacted emerging market currencies and the sharp depreciation in early November is visually apparent in the chart. Much of that recent depreciation move centres around trade policy uncertainty and how that will impact South Africa’s imports and exports.
Regarding domestic policies, the latest Medium Term Budget Policy Statement (MTBPS) delivered on the 30th of November had, as its objective, a strategy to rebuild the economy. As part of the intended rebuilding strategy, the minister referenced Operation Vulindlela. This operation was launched in October 2020 and established as a collaborative effort between South Africa’s National Treasury and the Presidency to drive and accelerate structural reforms across critical sectors of the economy.
The initiative was introduced as part of the Economic Reconstruction and Recovery Plan, created in response to South Africa’s prolonged economic challenges and the additional impact of the Covid-19 pandemic. The first phase of Operation Vulindlela focused on immediate reforms, like reducing power cuts and streamlining data costs. The MTBPS “launched” the second phase to build on these reforms to create a sustainable, growth-oriented economy.
One of the challenges within South Africa is the declining functionality of local government, and the second phase intends to improve the delivery of basic services (water and electricity), improve management and accountability, and introduce better financial oversight. Accountability and oversight at a municipal level are severely lacking in many provinces.
KwaZulu-Natal has the largest number of municipalities (54), but only 11 or 20% received clean audits in the last audit cycle. With 30 municipalities, the Western Cape had 70% return a clean audit, with Gauteng’s 11 municipalities returning 6 (55%) clean audits. The Free State did not have any municipalities that received a clean audit.
With such a high degree of mismanagement at the local level, it is unsurprising that the delivery of basic services and maintenance of local infrastructure is so lacking. On a national scale, South Africa’s Gross Domestic Product (GDP) is projected to grow by a modest 1.1% in 2024 and then to average around 1.8% over the next three years, according to National Treasury estimates. While these targets seem low, South Africa has significantly underperformed all market segmentations for over a decade.
National Treasury explains this: “The reasons for this divergence include declining capital investment, inadequate energy supply, unreliable logistics, the high cost of doing business, a poor public-sector balance sheet and a weak fiscal position.”
South Africa’s public sector balance sheet remains a concern. Government debt is projected to stabilise at 75.5% of GDP by 2025/26, but this assumes significant fiscal restraint and sustained revenue growth. Current debt-service costs consume over 21% of government revenue, which limits funds for critical areas like education, healthcare, and infrastructure.
Against a peer group of 94 emerging market economies, South Africa again shows divergence in terms of debt as a percentage of GDP and debt service costs as a percentage of revenue.
Given the South African unemployment rate, it is difficult to envision how the economic picture improves. While the broad unemployment rate fell to 32.1% in Q3 2024, over 60% of young South Africans (15-24 years) are unemployed, which amounts to 10.3 million people. A further 10.6 million people in the 25-34 age bracket are unemployed. It remains a distressing statistic for South Africa and one that is neither easily nor quickly resolved.
In some positive news for South Africa, given the weak economic backdrop, rating agency Standard & Poor’s (S&P) revised South Africa’s credit rating upwards from neutral to positive, providing guidance that there has been increased political stability since the formation of the Government of National Unity (GNU) coalition government. They feel this could provide the backdrop of increased investment in the country.
The chart below showing FDI over the past 5 years has an anomalous data point. The spike in the third quarter of 2021 (R557.9 billion) was the classification of the corporate transaction by global technology investment group Prosus NV, acquiring about 45% of its parent company, Naspers. In the second quarter of 2024, FDI was R16.6 billion (a more “usual” amount); this inflow was because of a corporate transaction in which Canal+, part of French media group Vivendi, invested in local broadcaster Multichoice.
While companies like Shell, BP and TotalEnergies have exited or reduced their investment in South Africa, Amazon Web Services (AWS) recently committed to investing an additional R30 billion over the next decade to develop infrastructure and cloud services for the African continent from its Cape Town base. Another positive infrastructural development is the proposed Cape Winelands airport, with an intended R7 billion development budget.
A move that could dampen investment enthusiasm is the consideration of a wealth tax by the National Treasury. South African Revenue Services (SARS) established the High Wealth Individual Unit in 2021, in line with a recommendation by the Davis Tax Committee, to consolidate data on wealthy taxpayers. From 2023 onwards, individual taxpayers with over R50 million in assets were required to declare their wealth. Currently, SARS and the National Treasury are evaluating the wealth data with a potential future wealth tax in mind.
In countries where wealth taxes have been introduced, often with the intended aim of reducing wealth inequality, the empirical evidence of the benefit has been mixed. These types of taxes frequently trigger capital flight and a disincentive to invest and reduce the tax pool the strategy intended to enhance.
There was, however, other good news over the quarter, particularly for South African consumers. This news came from the recent South African Reserve Bank (SARB) decision to decrease interest rates by 25 basis points (bp). The reduction in core inflation to 3.9%, the lowest level since April 2022, allowed the SARB to decide to cut rates unanimously. However, the guidance was cautious, given the potential for a strengthening US Dollar, which would affect import prices.
Core Holdings Overview
The equity exposure basket in the core portfolio includes three holdings, one of which is a new inclusion made over the quarter. Despite rising geopolitical tension, the Vanguard Total World Stock Exchange Traded Fund (ETF), which provides exposure to developed and emerging markets, was positive over the quarter. The pure emerging market exposure delivered by the iShares Emerging Market ETF was slightly negative over the quarter. Emerging markets tend to be sensitive to commodity prices, and significant volatility has occurred over the quarter. China’s sluggish economic recovery also impacted the index, and certain group members were facing currency depreciation due to the strength of the US Dollar.
Our new addition to the core portfolio equity holdings is the Invesco Russell 1000 Equal Weight ETF. Usually, indices are market-cap weighted, with the largest stocks making up the largest percentage holding in an index and thus being a driver of index performance. An equal-weighted index allows investors to capture broad market performance without the large-cap concentration risk. The Russell 1000’s performance has been strong over the quarter due partly to the recent earnings season, where many companies reported stronger-than-expected results.
Of the US large-cap stock sectors, only the energy, industrials and materials sectors saw a contraction in year-on-year earnings growth in the third quarter. Companies’ earnings in all other sectors expanded, creating stock price momentum as forecast earnings expectations were beaten.
Investor attention has been focused on the Fed, which cut interest rates by 25bp at the November meeting on the 7th. The Fed noted in their Federal Open Market Committee (FOMC) statement that: “inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.”
The core Consumer Price Index (CPI) measure, which excludes food and energy prices, was unchanged in October at 3.3% year-over-year (y/y), while the broad inflation measure was 2.6%. The difference between the two measures indicates that food and energy prices have fallen, but notably, the broad measure has now increased for the first time in seven months. In the Eurozone, inflation in November increased for a second month. Although inflation rates in both the US and Eurozone are low, the change in direction will cause many to consider how dovish the Fed will likely be at their December meeting.
Despite the reduction in US interest rates, the performance chart of the fixed income components of the core portfolio looks a little uninteresting.
Two of our fixed-income positions, the SPDR Long Term Corporate Bond ETF and the SPDR High Yield Bond ETF, are excellent yield generators. Both pay a consistent monthly dividend, with the higher credit corporate bond ETF yielding less than the lower credit quality high yield bond ETF.
Our newer exposure to the iShares 20+ Year Treasury ETF lost slightly over the quarter even as the Fed cut interest rates. Long-term yields remained elevated due to persistent concerns about inflation and fiscal policy. Investors had largely priced in the Fed’s rate cut well before the announcement, and markets focused on the long-term economic outlook and the anticipation of increased Treasury issuance to finance the growing US fiscal deficit.
The US fiscal deficit for 2024 reached approximately $1.8 trillion due to rising government expenditures and higher interest payments on the national debt. A combination of elevated federal spending and a slower pace of revenue growth drove this significant shortfall. Interest payments totalled nearly $900 billion, surpassing major budget categories like national defence.
A newer holding to “round out” the fixed income exposure across the yield curve is the iShares 1-3 Year Treasury Bond ETF. While the performance was flat over the quarter, this is consistent with the role of a relatively stable, lower volatility fixed income instrument. Expectations for potential rate cuts in December have buoyed demand for short-term Treasuries, providing some price support. Short-term bonds are highly sensitive to changes in interest rates, and a rate cut would typically drive bond prices higher.
Much of the performance of the fixed income component of the portfolio is reliant on the macroeconomic environment in the US. Any material inflation increase, or even the perception of an inflationary increase, will make markets and investors uncertain about additional interest rate cuts.
Real Estate Investment Trusts (REITs) are also highly sensitive to the interest rate environment. Based on 34 central banks, 71% are in “easing mode” versus just 9% in July 2023. If inflation is indeed “transitory”, then there may be more global easing to come, supporting interest rate-sensitive and riskier financial assets.
Towards the end of the last quarter, we lightened the exposure to the Global Natural Resources ETF as a mechanism to reduce our exposure to the energy sector. Crude oil prices have fallen over the quarter and have remained in quite a tight trading range between $70 and $80 per barrel for the last six months.
The Organisation of the Petroleum Exporting Countries+ (OPEC+) group (responsible for 50% of global oil supply and includes OPEC members and allies like Russia) is scheduled to meet on the 5th of December. OPEC+ members are holding back 5.86 million barrels per day of output, or about 5.7% of global demand. This move to hold back production demonstrates OPEC’s dilemma of balancing revenue stability with market influence. Despite accounting for 50% of global crude output and over 70% of proven reserves, the Organisation faces challenges from US shale production and slowing economic growth in major oil-consuming regions. OPEC’s strategies to support prices have inadvertently created incentives for competitors to fill supply gaps, a dynamic that has diminished the cartel’s pricing power. As a result, market reactions have been mixed; while production cuts have temporarily supported prices, a lack of sustained demand growth has limited their impact.
Core Conclusion
Market sentiment is influenced by multiple factors, including geopolitical tensions, commodity price volatility, and varying economic recovery rates across different regions. Emerging markets, in particular, face additional pressures from currency fluctuations and slower economic growth, especially in key economies like China.
Central banks worldwide are increasingly adopting an accommodative stance, with over 70% of institutions moving towards easing monetary policies. The Fed, in many ways, leads global central bank positioning, but while accommodative, it has signalled a cautious approach to managing economic challenges.
Inflation remains a critical focal point, with core consumer price indices showing mixed signals. While headline inflation rates have moderated, there are persistent concerns about underlying economic pressures.
Investors and policymakers are closely watching potential interest rate movements, global economic recovery trajectories, and the ongoing balance between stimulating economic growth and managing inflationary pressures. The coming months will likely be critical in determining the global economic momentum and central bank strategies.
Satellite Holdings Overview
The satellite portfolio invested in three new positions over the quarter: the iShares Future AI & Technology ETF, the Global X China Semiconductor ETF, and the iShares Russell 2000 ETF. Additional exposure was added to our position in the VanEck Vietnam ETF, and we exited the position in the small-cap energy sector.
Many investors will be familiar with the mega-cap names in the Artificial Intelligence (AI) and technology sector, including Nvidia, Meta, Microsoft and AMD. And while these large players do attract news headlines, some of the smaller holdings in the iShares Future AI & Technology ETF, whose names are likely completely unknown, are impressive in their own right.
One of those smaller holdings is a company called nCino. It’s listed on the NASDAQ stock exchange and provides cloud-based banking software to some of the world’s leading banks and financial institutions. The company has over 1,850 customers worldwide, including Barclays Bank in the United Kingdom (UK) and US Bancorp and Bank of America Merrill Lynch in the US, which use the software platform for their core banking services. Given nCino’s customer base, it becomes clear that banks do not develop their own software but instead subscribe to banking software from specialist providers. While we’re familiar with the names of the banks, there are also unrecognised providers vital to the banking ecosystem powering the back-end banking transactions and customer interface.
Another company operating “behind the scenes” is the NYSE-listed UiPath Inc. in the robotic process automation sector. Its clients include Spotify, NASA, Deloitte and, closer to home, FlySafair. The South African airline worked with UiPath to automate its booking process, invoicing, and back-end processes for flash sales. FlySafair now has two unattended intelligent robots working on seven automations across the business.
Another likely unknown holding is SentinelOne, a leader in AI-driven cybersecurity, providing endpoint protection to prevent cyberattacks. Its autonomous platform uses machine learning to detect, prevent, and remediate cyber threats without human intervention, making it crucial for protecting sensitive data and systems. It’s sometimes hard to appreciate how problematic cyberthreats and the groups behind them are to our software-driven modern world.
A genuine threat is Quantum Ransomware (Quantum), which became operable in 2021. Quantum is a splinter group from Conti, which is malware developed and first used by the Russia-based hacking group “Wizard Spider” in December 2019. It has since become a full-fledged ransomware-as-a-service (RaaS) operation used by numerous threat actor groups to conduct ransomware attacks.
In June 2022, Quantum used their version of a tactic known as BazarCall. BazarCall is used to gain initial access to a victim’s network and involves emailing victims as a first step. The emails allege that a paid subscription is up for automatic renewal, but the renewal can be cancelled if the victim calls a specific number. Once the victim calls the number, the threat actor on the other end of the line convinces the victim via social engineering to start a remote access session using software controlled by a network intruder. While the victim is distracted on the call, the intruder tries to figure out how to compromise the victim’s network without triggering alarms. These kinds of attacks are highly targeted and make it difficult for cybersecurity professionals to detect due to the social engineering aspect of the attack.
This kind of attack from Quantum locked up the network of a New Jersey healthcare system in July 2022. The attackers exfiltrated data from the organisation and demanded $500,000 in ransom in exchange for the data’s return. While portfolio-holding SentinelOne does not disclose their client, they have a notable case study in which their cybersecurity software was able to identify the ransomware activity autonomously, isolate the compromised endpoints, and execute a rollback to restore encrypted files, all without manual intervention. This kind of cybersecurity and protection software is now vital to company operations.
Another of our new holdings, comprised of lesser-known corporate names, is the investment in the Russell 2000 ETF. The underlying index is a market-cap weighted basket of the smallest 2,000 US-listed stocks. Financials, industrials and healthcare comprise the largest sector exposure within the Index. Within the financials sector, the companies included are primarily regional banks, insurance companies, and REITs whose customers and focus are in the United States.
Similarly, within the healthcare and industrial sector, there is significant exposure to US domestic customers, with an estimated 80% of Index members deriving revenue from domestic operations. This domestic focus contrasts the large-cap members of the S&P 500 that have substantial international exposure.
Given the domestic nature of the Russell 2000, the Index’s performance is very sensitive to the economic health of the US economy.
Over the past 5 years, the Russell 2000, although positive, has underperformed the global-technology-heavy NASDAQ and S&P indices. From a historical perspective, this spell of US small-cap underperformance is unusual. According to influential academics Fama and French, US small-caps have outperformed US large-caps by 2.85% per year on average since 1926.
Due to their limited capacity to adjust cost structures compared to larger companies, small-cap firms are more sensitive to economic changes. As a result, even modest revenue shifts can significantly impact their profitability. Small-cap companies also tend to be more sensitive to the interest rate environment, and the Fed’s second recent rate cut is positive for the Russell 2000 constituents. Compared to larger companies, small-cap businesses tend to have more floating-rate loans rather than fixed-rate debt. As such, many small-cap firms will see their existing loan payments shrink as interest rates decline.
In addition to lower interest rates, several factors could contribute to improved performance for small-cap companies under the fiscal policies associated with the Trump administration. Likely incoming fiscal policies include tax cuts and deregulation.
Anticipated regulatory easing and relaxed oversight of mergers could support small-cap growth as smaller firms may become attractive acquisition targets, often at premium valuations. Deregulation also tends to have a more significant positive impact on smaller businesses, which bear a heavier burden from compliance costs than larger competitors.
US domestic manufacturers, in particular, could see advantages if trade policies become more protectionist, as they are less reliant on international markets than their larger counterparts.
Satellite Conclusion
The satellite portfolio reflects emerging technological and economic themes, with strategic investments highlighting three key areas: AI, cybersecurity, and small-cap domestic US opportunities.
The Russell 2000 investment represents a bet on US domestic economic resilience. This small-cap focus is particularly sensitive to potential fiscal policy changes, including anticipated tax cuts, deregulation, and protectionist trade policies. The portfolio positioning suggests anticipation of domestic economic stimulation and potential consolidation opportunities among smaller enterprises.
Thematically, the portfolio reflects a purposeful, strategic approach to technological disruption, cybersecurity challenges, and potential domestic economic policy shifts. These positions, the macroeconomic environment and investor sentiment, will be closely monitored to ensure suitable holding periods and profit-taking when appropriate.
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