February 2025 newsletter

Highlights of this month’s newsletter:

“The biggest financial decision you’ll ever make have nothing to do with money. Who you marry, how you treat your body, how you spend your free time, and who you spend time with. Nothing is more expensive than bad habits and bad company.“

– Morgan Housel

Market overview: performance figures (%)

Source: Edmond de Rothschild, 03/02/2025

Source: Edmond De Rothschild

In January 2025, global financial markets experienced significant volatility, driven by a combination of economic indicators, the emergence of DeepSeek, and the announcement of new U.S. tariffs under President Donald Trump. As expected, the Federal Reserve maintained the federal funds rate at 4.25%-4.50% in its January meeting, marking the first pause since it began cutting rates in September 2024. The Fed has reduced rates by a total of 1 percentage point since then, following a plateau of 5.25%-5.50% since July 2023.

DeepSeek: A paradigm shift in AI

With the release of DeepSeek, we anticipate a shift towards more efficient AI models that do not rely on vast clusters of AI GPUs and related hardware. This evolution is essential for the long-term viability of AI across various use cases. Lower costs will make AI more economical, broadening its applications and increasing demand. This mirrors past technological revolutions, such as the PC era, where decreasing computing costs enabled widespread adoption, and the subsequent cloud and SaaS boom, where the marginal cost of adding users was negligible.

We believe a scenario where AI remains prohibitively expensive while simultaneously “taking over the world” is unlikely. The advancements brought by DeepSeek support a more sustainable and accessible AI ecosystem, which we view as a positive development.

U.S. Tariffs

On February 1, 2025, President Trump announced new tariffs on Canada, Mexico, and China, citing concerns over illegal immigration and drug trafficking, particularly fentanyl. These tariffs will take effect on February 4, 2025.

• Canada and Mexico: A 25% tariff on all imports, with an additional 10% tariff on Canadian energy products (oil, natural gas, and electricity).
• China: A 10% tariff on imports, supplementing existing tariffs of up to 25%.

Corporate earnings highlights

Several major corporations reported earnings in January, with notable developments:

• Taiwan Semiconductor Manufacturing Co. (TSMC): Fourth-quarter revenue reached $26.9 billion, up 39% year-over-year, with gross margins improving to 59%. Management raised its long-term growth outlook, projecting 20% annual revenue growth, driven by AI chip demand, which accounted for 15% of 2024 revenue and is expected to reach 50% by 2029. TSMC remains an attractive investment, trading at a forward P/E ratio of 29, with a projected compound annual growth rate of 20% over the next three years, justifying its valuation.
• Meta: Reported a strong quarter, with revenue up 21% to $46.8 billion and operating margins expanding to 48%. User growth continued, reaching 3.35 billion globally. AI-driven ad optimization contributed to the strong performance. Meta trades at a P/E of 27, above its five-year average of 24, but remains attractive given robust earnings growth and profit margins.
• LVMH: Reported a 1% sales decline for FY24, with EPS down 17% due to weakness in Asia. Despite the short-term challenges, LVMH maintains a strong competitive advantage with its portfolio of prestigious brands. The stock trades at a forward P/E of 25, aligning with its five-year average. We remain buyers of the share.
• Visa: Net revenue grew 10%, with transactions increasing 11%. Visa benefits from a strong network effect, and we expect continued growth given its competitive position in digital payments. The stock trades at a P/E of 28, justified by its strong profit margins and long-term growth potential.
• Microsoft: Revenue rose 12% year-over-year to $69.6 billion, with solid performance across all segments. AI demand and cloud growth continue to be strong. Microsoft remains well-positioned in AI and cloud computing, trading at a P/E of 30, which we view as reasonable. We maintain a bullish stance on the stock.

Market concentration and outlook

In 2024, a small number of companies drove the majority of market returns. Only 28% of S&P 500 companies outperformed the index, emphasizing the importance of selecting the right companies. While 2025 may bring lower overall returns, we anticipate broader-based gains across the market. Our strategy remains focused on investing in high-quality companies and capitalizing on opportunities when valuations become attractive.

Chart 1: % of stocks in S&P 500 outperforming the index since 1990 by year

Source: Bank of America

Conclusion

As we highlighted in our January newsletter, 2025 is shaping up to be a volatile year, influenced by President Trump’s policies, AI advancements and the Chinese economy’s performance. Encouragingly, the majority of the companies in our portfolio that have reported earnings so far have delivered solid results, reinforcing our confidence in our investment strategy. We will continue to monitor these factors and seek opportunities to add to our positions in high-quality companies as market conditions evolve.

Source: Moneyweb, RMB

The South African economy enters the new year on a firmer footing, supported by favorable tailwinds that gained momentum in the latter part of last year. Receding inflationary pressures, easing monetary policy, broad-based improvements in economic sentiment, and enhanced energy stability have created a more constructive macroeconomic backdrop. We expect growth in 2024 to reach 1.0%, up from a revised 0.7%, driven by updated agricultural data. The Bureau for Food and Agricultural Policy estimates agriculture’s year-to-date contraction at 5%–6%, significantly less severe than Stats SA’s 15.5%, with a quarterly decline of 4.8% instead of 28%.

As we enter 2025, the key question remains whether this nascent recovery can be nurtured into a sustained growth trajectory or its chronic structural challenges will again constrain South Africa. Last year’s economic foundations point to modest GDP growth: 1.9% in 2025, 2.0% in 2026, and 2.2% by 2027.

Chart 2: Global and South African real GDP growth

Source: IMF, RMB

Growth in 2025 is expected to be driven primarily by a rebound in household consumption, as declining inflation boosts real incomes and lower interest rates reduce debt service burdens while facilitating credit growth. Additionally, the extra liquidity from the two-pot retirement system is likely to support consumer spending, albeit with some challenges. Rising employment, supported by improving economic activity, should strengthen disposable incomes.

The investment narrative for 2025 is expected to center on recovery from the downturn experienced in 2024. This expansion will be supported by improved business confidence, policy stability, and lower financing costs. However, while these factors are essential, they are not sufficient on their own. The real challenge lies in converting these favorable conditions into a sustained path of intense economic activity.

On the downside, exports remain a concern, with persistent logistical bottlenecks continuing to hinder supply-side performance. While moderate growth among trading partners and a slight uptick in commodity prices offer some upside, these factors are not transformative. A relatively undervalued currency may provide partial relief, but underlying structural inefficiencies remain a significant constraint. The current account deficit is expected to narrow slightly, supported by improved terms of trade and a relatively stable trade balance. However, global economic conditions present a mixed outlook, with a potential slowdown in China posing a notable downside risk to trade.

Chart 3: Difference between global and South African growth

Source: IMF, RMB

Outlook for 2025

The outlook for 2025 and beyond depends on the deepening and acceleration of structural reforms. Sustaining and expanding these gains will require a firm commitment to addressing entrenched inefficiencies, enhancing governance, and ensuring the effective implementation of reforms. Without this resolve, the economy risks falling short of its potential again—a pattern South Africa can no longer afford to repeat.

We maintain a positive outlook on growth, supported by signs of convergence with global trends. If realized, these growth rates would mark the strongest performance since 2013, excluding the anomalous post-lockdown rebound of 2021. This trajectory is undeniably encouraging, particularly against a global economy grappling with stagnation, slow reform momentum, and mounting fiscal pressures.

However, optimism must be tempered with realism. While the momentum is promising, growth remains well below the levels needed to address South Africa’s deep-rooted socio-economic challenges meaningfully. Despite the improvement, the pace of expansion is unlikely to generate the scale of job creation, poverty alleviation, or structural transformation required to reverse decades of underperformance.

Share of the month: Ferrari (RACE)

Ferrari is one of the world’s most iconic luxury brands, embodying exclusivity, Formula One-inspired performance, and Italian craftsmanship. These brand pillars are meticulously maintained to uphold Ferrari’s strong competitive moat.

Since its 2016 IPO, Ferrari has pursued a horizontal growth strategy, offering the most extensive product lineup among luxury supercar manufacturers. This approach has allowed the company to expand total volumes while preserving its exclusivity. Over the past decade, Ferrari’s total vehicle deliveries have surged by 88%, yet the average number of units sold per model per year has remained around 1,000.

Exclusivity is further reinforced through Ferrari’s tiered customer segmentation, which categorizes buyers into “future Ferraristis,” “Ferraristis,” and “collectors.” The first two groups have access only to Ferrari’s higher-volume models, often facing a waiting period of up to two years. Demand is intentionally kept above supply. Only top-tier collectors can purchase Ferrari’s exclusive offerings, including limited-edition Icona and supercar models.

Investment thesis

After a period of post-pandemic acceleration and significant price increases (average selling price up 37% since 2018), Ferrari’s revenue growth has moderated from approximately 20% to a high single-digit rate. For 2024, the company targets at least 9% revenue growth. Demand remains exceptionally strong, with the order book filled well into 2026.

Ferrari plans to launch its new supercar, the F80, in Q4 2025, with a starting price of €3.6 million. All 799 units have already been sold ahead of the official reveal, with demand exceeding supply threefold. Additional Spider and Aperta variants may follow from 2027. The company will also debut its first battery-electric vehicle (BEV) in late 2025, manufactured in a dedicated EV plant, though details remain under wraps.

Valuation

Ferrari trades at a 2025 P/E of 46x and EV/EBIT of 36x, reflecting its scarcity value, exceptional pricing power, and ultra-high margins. The company benefits from a two-year order backlog, limited competition, and resilience to economic cycles, justifying its premium valuation. Since mid-2024, Ferrari has maintained a 10-35% valuation premium over Hermès (currently 14%), supported by its lower exposure to China and strong global demand.

Chart 4: Ferrari’s share price 5-year total return (+156%)

Source: Julius Baer

Chart 5: Ferrari’s 12-month forward P/E

Source: Julius Baer

Chart 6: Earnings per share versus performance

Source: Julius Baer

Chart 7: Financials

Source: Julius Baer

Graph of the month 1: The effect of missing the best market days over the last 25 years

“Market timing is key to high returns”

Many believe timing is key, but missing just a few top-performing days significantly impacts long-term returns.

Source: Y-Charts

Annualized returns over the last 25 years, when missing the best…

Missing just the 10 best market days over 25 years cuts returns nearly in half.

Staying fully invested ensures you maximize long-term growth potential.

Graph of the month 2: U.S. equity P/E valuations vs. history

Source: Goldman Sachs Investment Research

Lesson 14 is not about timing the market; Morgan Housel highlights one of investors’ most common mistakes—trying to predict short-term market movements. The allure of buying at the lowest point and selling at the highest is strong, but in reality, this strategy is nearly impossible to execute consistently. Markets are influenced by countless variables—economic trends, geopolitical events, investor sentiment, interest rates, and even unexpected global crises—all of which make short-term forecasting unreliable.

Housel argues that investors should focus on long-term strategies instead of attempting to time the market. History has shown that markets tend to grow over time despite short-term volatility. Investors who stay invested and maintain a disciplined approach often outperform those who attempt to jump in and out of the market based on short-term speculation. This is because missing just a few of the best-performing days in the market can drastically reduce overall returns.

One of the main risks of market timing is emotional decision-making. Investors may feel overconfident and buy at inflated prices when the market is soaring. Conversely, when the market crashes, fear often leads people to sell at a loss, locking in declines instead of waiting for a recovery. This cycle of buying high and selling low can be devastating to long-term wealth accumulation. By staying invested and avoiding reactionary decisions, investors can ride out market fluctuations and benefit from the long-term upward trajectory of the market.

A better approach is to adopt a consistent investment strategy, such as dollar-cost averaging—investing a fixed amount regularly regardless of market conditions. This strategy reduces the impact of short-term volatility and allows investors to accumulate assets at an average cost over time. It also removes the pressure of trying to predict market movements and shifts the focus toward long-term wealth building.

Housel also underscores the importance of patience and perspective. Short-term market swings may feel significant at the moment, but they are often just noise in the broader picture. Investors who remain focused on their long-term goals—retirement, wealth preservation, or financial independence—are more likely to succeed than those who constantly react to short-term trends.

In conclusion, It’s Not About Timing the Market is a lesson in discipline, patience, and trust in the long-term resilience of the financial markets. Investors should adopt a steady, long-term approach instead of chasing short-term gains or reacting to daily market fluctuations. Doing so increases their chances of building sustainable wealth and avoiding the costly mistakes associated with market timing.