January 2025 newsletter

In this month’s newsletter

“Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behaviour is hard to teach, even to really smart people.“

– Morgan Housel

Market overview: performance figures (%)

Source: Edmond de Rothschild, 20/12/2024

International market overview

Source: Edmond De Rothschild

As the new year commences, familiar patterns from the past seem to be reemerging. The United States will have a new president in 2025, yet his return feels like a déjà vu moment. Markets have already rallied in anticipation of the new administration’s proposed economic policies, much like the post-election surge of 2016. The U.S. economy remains robust, continuing to lead the global landscape even as other economies falter.

While this outlook offers reasons for optimism, it is crucial to recognize the challenges we face today. Much like the Cold War era, U.S. global leadership is under pressure. Ongoing conflicts in Ukraine and the Middle East, along with rising tensions with China, threaten geopolitical stability. Although the outcomes remain uncertain, heightened macroeconomic risks often correlate with market volatility. We witnessed this in 2024, when markets reached record highs before retreating during July amid concerns over potential economic slowdowns.

The Federal Reserve has largely achieved its objective, with inflation moderating and labor markets remaining robust (graph 1). The focus now shifts to carefully adjusting interest rates to maintain economic stability. The Trumponomics 2.0 policy agenda—emphasizing tax cuts, tariffs, and deregulation—could bolster U.S. economic growth and risk assets. However, it may also contribute to a stronger dollar, higher inflation and elevated interest rates (graph 2).

Graph 1: Inflation and unemployment have normalized

Source: Capital Group

Graph 2: Strong US economy could lead to elevated interest rates

Source: Capital Group

Current elevated U.S. equity valuations remind us of the importance of prudent investment strategies. A balanced approach — focusing on both capital growth and preservation — is essential in an environment where corrections are likely to occur. Despite the uncertainties, reasons for long-term optimism persist. Technological advancements, particularly in artificial intelligence and healthcare innovation, are poised to drive future earnings growth. We tend to overestimate the near term and underestimate the long term (graph 3). At the same time, bonds are regaining their traditional role, with normalized interest rates offering income, diversification and protection against equity market volatility.

Graph 3: Initial forecast vs the actual numbers

Source: Capital Group

The risks outlined above are unlikely to dissipate soon, underscoring the importance of rigorous fundamental research. Remaining invested with a risk-aware perspective is paramount. In times of market swings or geopolitical unrest, the greatest mistake investors can make is to sell. Conversely, rushing in during market peaks can be equally damaging. Successful investing is, and always will be, a long-term endeavor.

South African market overview

Source: Moneyweb, SARB

Highlights from the SARB Quarterly Bulletin

Encouraged by the coalition government’s pro-growth stance, South Africa reported its first net inflows of foreign investment in debt and equity markets since 2022. In the third quarter, portfolio inflows reached R45 billion ($2.7 billion), a significant reversal from the R20 billion outflow in the prior quarter, according to the South African Reserve Bank’s Quarterly Bulletin.

Non-residents’ net purchases of local debt totaled R41 billion, up from R13 billion in the previous quarter, signaling growing investor confidence in South Africa’s economic trajectory under its new political leadership.

Chart 4: South African foreign inflows surge most in more than two years

Source: South African Reserve Bank

JSE All-Share Index ends 2024 on a high note

The JSE All-Share Index capped off 2024 with a robust 9.4% return for the year, reflecting a recovery in South African equities. Of the 283 shares listed on the exchange for the year, 185 recorded price increases, with 75 of them soaring by at least 30%. Seven shares remained unchanged, while 91 declined, including 23 that fell by more than 30%.

 

Top performers of 2024

Most of the top-performing shares were SA Inc. shares, benefiting from the political stability and optimism following the 2024 elections. The standout performer was WeBuyCars, which spun off from Transaction Capital and listed in April. The share surged 111% since its debut, making it the best-performing share of the year.

 

Resource shares under pressure

In contrast, resource shares dominated the list of 2024’s worst performers, reflecting slumping global commodity prices driven by softening demand from China. Adding to the challenges, Donald Trump’s US presidential election victory bolstered the dollar, further weighing on precious and industrial metal prices. Among the bottom 50 performers were mining heavyweights such as Gemfields, Kumba Iron Ore, Amplats, Sibanye-Stillwater and Thungela.

 

Outlook for 2025

2025 presents South Africa with a mix of significant opportunities and notable risks. To foster greater credibility and bolster investor confidence, the Government of National Unity (GNU) must ensure that authentic and decisive leadership underpins every Cabinet decision. While external influences will continue to pose challenges, South Africa’s economic trajectory will largely depend on domestic policy choices that promote an efficient, stable, and consistent macroeconomic environment conducive to investment and job creation.

• Economic growth: The economy is set to embark on a cyclical upswing, with GDP growth forecasted to rise from an estimated 1.1% in 2024 to 1.9% in 2025. This growth is more than double the ten-year average of 0.8%, signaling a potential turnaround if key structural reforms are implemented.
• Monetary policy: Investec’s projections suggest that the repo rate could see an additional 50-basis-point reduction in Q1 2025. A further 25-basis-point cut may follow, contingent on factors such as inflationary pressures, global market trends, and the pace of domestic economic recovery.

Critical Success Factors for 2025

• Policy stability: Sustaining investor confidence will require a predictable policy environment that supports private sector growth and innovation.
• Leadership: Decisions by the GNU must reflect transparency and accountability to ensure that reforms translate into tangible benefits for South Africans.
• Domestic reforms: Tackling critical issues such as electricity supply, logistics and regulatory inefficiencies will be pivotal in unlocking South Africa’s growth potential.

While the path forward is fraught with challenges, 2025 could mark a year of consolidation and recovery, provided South Africa leverages its opportunities wisely and navigates risks effectively.

Important reminder regarding your Tax-Free Investment Account (TFIA)

We want to remind you that the deadline to utilize your 2024/25 annual tax-free benefits is fast approaching. Ensure you make the most of your contributions (R36,000 per year) before the tax year ends on 28 February 2025.

Share of the month: ASML

Chart 5: ASML’s share price 5-year total return (+141%)

Source: Morningstar

The machine that makes the machines

Advanced Semiconductor Materials Lithography (ASML) stands as one of the most critical companies in the semiconductor supply chain. Contrary to a common misconception, ASML doesn’t manufacture chips like those used in Apple or NVIDIA products. Instead, it designs and builds the lithography machines essential to creating advanced microchips.

The Wall Street Journal aptly calls ASML’s flagship equipment the “Most indispensable machine in the world.” These machines, used to produce cutting-edge chips, are technological marvels:

• Cost & transport: Each machine costs $370 million and requires three Boeing 747s to transport.
• Precision engineering: The machines use twin lasers to generate ultraviolet (EUV) light. These lasers fire at tin droplets 50,000 times per second, creating plasma hotter than the sun. Multi-layered mirrors guide this light, the smoothest objects ever manufactured.
• Complexity: With 457,329 components and two decades of development, ASML’s EUV systems represent the pinnacle of human engineering.

The EUV edge

EUV lithography is the foundation of modern chip miniaturization. However, challenges persist:

• Photon energy issues: As chips shrink further, the shorter wavelengths of EUV light increase photon energy, risking damage to photoresists and affecting precision.
• Industry investment: The development of EUV technology was a massive gamble. Intel invested $4 billion in ASML in 2012, building on billions in grants and investments from other major players.

The reliance on ASML’s machines and Taiwan Semiconductor Manufacturing Company (TSMC) illustrates the concentration in the semiconductor industry. For instance, Apple’s most advanced processors are exclusively produced in a single TSMC factory—the most expensive factory ever built.

Valuation and profit outlook

ASML remains a high-growth, high-margin business. Despite some near-term headwinds, our fair value estimate for the ADR shares stands at $880, representing a 2025 price-to-earnings ratio of 36 times.

Key drivers and forecasts:

• 2025 Sales Guidance: Adjusted to €32 billion, down from an earlier forecast of €36 billion. Sales growth has slowed as logic foundries adopt new nodes more gradually, and memory capacity expansions remain limited.
• 2030 Sales Outlook: Revised from €58 billion to €54 billion.
• Long-Term Growth: Low-double-digit growth is expected in 2026 as delayed sales from 2025 materialize.

ASML’s unparalleled position in the semiconductor value chain ensures its long-term relevance, even as it navigates temporary slowdowns in demand. For investors, ASML represents a unique opportunity to hold a stake in the future of technological innovation. ASML has an 8.5% weighting in the Euro Stoxx 50 index.

Chart 6: ASML’s growth rates (compound annual)

Source: Morningstar

Chart 7: Valuation analysis

Source: Morningstar

The Psychology of Money: Chapter 13 – Money is a means to an end

In Lesson 13, Money Is a Means to an End, Morgan Housel reminds readers of an essential truth about wealth: money is a tool, not the ultimate goal. Its value lies in what it enables us to achieve, not its accumulation for its own sake. This perspective shifts the focus from viewing money as an abstract measure of success to seeing it as a resource that can help us build a life aligned with our aspirations, values, and priorities.

Housel emphasizes that money’s primary purpose is to create opportunities and solve problems. Whether it’s ensuring financial security, pursuing personal passions, or providing for loved ones, money bridges our goals and their realization. For instance, someone may save and invest not to see a large number in their account but to retire early, travel the world, or fund their children’s education. We can direct our financial resources toward meaningful ends by clearly identifying what we truly want.

The lesson also warns against the trap of chasing wealth without understanding why. Many people fall into the habit of seeking more money simply because they equate it with success or happiness. However, this mindset often leads to dissatisfaction, as no amount of money will feel like enough without a clear purpose. Instead, Housel advocates for intentionality: understanding what brings fulfillment and structuring financial decisions around those priorities.

A crucial point in this lesson is that money doesn’t inherently provide happiness. While it can eliminate financial stress and provide comfort, its ability to enhance life depends on how it’s used. Spending money on experiences, personal growth, or contributing to others’ well-being often yields greater satisfaction than acquiring material possessions. This underscores the importance of aligning financial decisions with personal values and goals.

Housel also highlights the importance of balance. While saving and investing are critical for achieving long-term objectives, using money to enhance the present is equally important. There’s little value in hoarding wealth if it comes at the expense of enjoying life or maintaining meaningful relationships. Striking this balance requires clarity about what matters most and a willingness to allocate resources accordingly.

In conclusion, Money Is a Means to an End reframes our relationship with wealth by emphasizing its role as a tool to achieve what truly matters. By focusing on the outcomes we want—security, freedom, or fulfillment—we can use money to bring genuine value to our lives. This lesson serves as a reminder to approach financial decisions with purpose and intentionality, ensuring that our wealth supports the life we want to lead rather than becoming an end in itself.

Chart of the month 1: Inside ASML’s High-NA EUV system

Source: ASML investor presentation

Graph of the month 2

Source: Bloomberg

Graph of the month 3

Source: BofA Global Investment Strategy, Bloomberg

Sources

Alpine Macro, Anchor, Bloomberg, BNY Mellon, Charlie Bilello, Compound Advisors, Edmond De Rothschild, ETFMG, FactSet, Haver Analytics,  JP Morgan, Julius Baer, Morningstar, Morgan Stanley, Refinitive, RMB, Statista, Sygnia, Strategas, The Intelligent Investor, UBS.