Market watch: Strong returns in a volatile world

2025 IN REVIEW

2025 was a good year for equity investors. After the sharp correction in global markets in April following the initial “Liberation Day” tariff announcements by President Trump, the bull market reasserted itself, making up all the losses and posting ever-new highs.

The Artificial Intelligence (AI) boom was a major driver of markets, with big tech shares leading the charge. The boom is very real, and likely to be transformational for many industries. We are working to identify the key winners and losers from this rapidly evolving race, while remaining mindful of the limits of forecasting long-term AI outcomes. We will continue to avoid putting too many eggs in one basket.

A second major feature of 2025 was a weaker US dollar alongside sharply higher gold and precious metal prices. Gold in particular benefited from central banks diversifying foreign exchange reserves away from the dollar, while the weaker greenback also lifted emerging-market currencies, including the South African rand, which appreciated by 12% over the year.

The net result was that the MSCI World Index rose by 21.1% and the MSCI Emerging Markets Index by 33.6% in US dollar terms, but only 6.5% and 17.5% respectively in rand terms. 

While global equities had a strong year, global bonds lagged, reflecting our long-standing concerns around sovereign debt levels, which we continue to view as unsustainably high. The Bloomberg Barclays Global Aggregate Bond Index returned 8.2% in US dollars but fell 4.9% in rand terms. Our multi-asset portfolios benefited from their high global equity and low global bond positioning over the year.

South African assets also had a very good year. Gold and platinum shares were the standout performers, while SA Inc shares lagged amid weak economic growth and low consumer confidence. In contrast to global bonds, South African bonds performed exceptionally well as yields fell sharply, supported by continued downside inflation surprises and the SARB’s announcement of a lower 3% inflation target. 

LOOKING BEYOND THE RETURNS

While most investment commentary focuses on returns, one also has to take note of the risks to which investors are exposed. In our view, true investment risk is not volatility or benchmark-relative underperformance, but the risk of permanent capital loss.

Professional investors like us are not paid to avoid risk, but to manage it. The first and most important safeguard is avoiding overpaying for assets. We do this through our long-standing, valuation-driven approach, which involves estimating, within a reasonable range, the future earnings stream of an asset and calculating what it is worth today. When the market price is below our estimate of fair value, we consider investing.

The second way to manage risk is to avoid excessive concentration. This is best achieved by building well-diversified portfolios exposed to a spread of companies, industries, countries, and economic drivers. 

South African investors historically faced high concentration risk due to strict exchange controls. When I began investing 40 years ago, South African investors were not able to invest offshore. Today, retirement funds can allocate up to 45% offshore, and many global companies are listed on the JSE, materially reducing single-country risk for local investors.

As we enter the new year, there are areas of concentration risk that concern us.

The first is the MSCI World Index’s heavy exposure to the US, and in particular to large technology stocks. “US exceptionalism” describes the relentless outperformance of the S&P 500 over recent decades, but while the US represents roughly a quarter of global GDP, it now accounts for more than 70% of the MSCI World Index. Within the S&P 500, the top six shares – all AI-focused tech stocks – make up more than 30% of the index, creating significant single-factor risk. The scale of capital investment flowing into the sector raises the risk that returns may ultimately disappoint. While we do have some AI exposure, we continue to find attractive opportunities across other sectors and regions, leaving our global equity holdings far less concentrated than the MSCI World Index.

A second area of concentration risk lies in the South African equity market. Following a powerful bull run, gold shares now make up 16% of the FTSE/JSE All Share Index, despite gold mining contributing only 3% of GDP and 7% of total exports. With gold prices at historically high levels, investors face the risk of capital losses should prices reverse. Our portfolios retain some exposure to gold, but far less than the index weighting.

POSITIONING FOR AN UNCERTAIN FUTURE

AI is likely to remain a dominant force in global markets. The wide range of outcomes associated with this new technology compels us to stay true to our beliefs of building well-diversified portfolios and not to overpay for assets.

We do not take strong currency views, as currencies are notoriously hard to forecast, and it remains unclear whether the recent dollar weakness will persist. In the US, the term of Federal Reserve Chair Jerome Powell is coming to an end, raising concerns that political pressure on his successor could lead to overly aggressive rate cuts and renewed inflation. Long-dated US government bond yields remain elevated above 4%, suggesting inflation expectations may not be fully anchored.

In South Africa there are encouraging signs. Inflation has been lower than expected, power supply constraints have eased, and rail and port performance has improved. A low oil price and strong commodity prices have supported the country’s terms of trade, while the Government of National Unity has worked through its early challenges following the delayed budget. The sharp fall in government bond yields and a stronger currency reflect some of this improvement.

That said, economic growth remains weak. Unemployment is extremely high and fixed capital formation remains too low to lift the economy to a higher growth trajectory. We therefore continue to maintain high offshore exposure in our multi-asset funds, where we see a broader opportunity set.

There will, no doubt, be surprises in the year ahead. There always are. The year has barely begun and already events in Venezuela underscore how quickly developments can unfold. History has shown, however, that robust portfolios can navigate all kinds of unforeseen events. One does not need to be a clairvoyant to be a good investor. For over 30 years, we have applied a disciplined, well-researched approach, and we continue to do just that.

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