March 2025 Newsletter

Highlights of this month’s newsletter:

“AI is like teenage sex: everyone talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone claims they are doing it.“

– Lucas Vargas, reappropriating the brilliant words by Dan Ariely

Market overview: performance figures (%)

Source: Edmond de Rothschild, 03/03/2025

Source: Edmond De Rothschild

President Trump’s bark, often worse than his bite, refers to his pattern of making bold, aggressive statements that often don’t translate into equally extreme actions. This has been evident in foreign policy, where more measured actions followed threats against China, North Korea, and Iran. In domestic policy, promises to repeal Obamacare, build a fully funded border wall, or enact mass deportations fell short. His rhetoric often serves as a negotiation tactic or political messaging tool, but legal, political, and institutional constraints frequently limit his follow-through.

Chart 1 highlights how U.S. trade policies and political events—such as elections, tariffs, and trade disputes—have significantly impacted global trade uncertainty.

Chart 1: Trade policy uncertainty index

Source: Caldara et. al (2020), Deutsche Bank

We certainly did not anticipate in early December 2024 that the European and Chinese markets would shrug off Trump’s political baiting and tariff threats and outshine Wall Street in the first two months of 2025. At the time of writing, the S&P 500 is up 1.7% since January 1, compared with gains (in US dollars) of 12.6% for the Euro Stoxx 50 and 14.2% for Hong Kong’s Hang Seng Index.

S&P 500 trailing twelve-month (TTM) operating EPS is on track for a new record high. At the time of writing, 75% of companies had reported Q4 earnings, reflecting a 9.5% increase over the past year.

Chart 2: S&P 500 operating EPS (TTM)

Source: Charlie Bilello

Growing enthusiasm over the AI revolution has driven substantial multiple expansion over the past year, pushing the S&P 500’s price-to-peak earnings ratio to 25.5—the highest valuation since June 2000 and 48% above the historical median.

Chart 3: S&P 500 price to earnings ratio

Source: Charlie Bilello

The Magnificent 7 (Mag 7) shares have been underperforming the market in 2025, but this is not the first time during their multi-year bull run. There are three potential outcomes for the Mag 7 shares this year:

1. The Mag 7 mania could resume promptly if the macro environment remains favorable.
2. A temporary inflation scare could delay the Mag 7 mania into the year’s second half, leading to a rotation into cheaper “Old Economy” stocks.
3. Massive Mag 7 capex outlays could destroy shareholder value if they fail to generate profitable use cases, leading to margin and multiple compression.

Overall, the Mag 7 companies have continued to deliver strong financial results, though the growth pace appears to be moderate compared to the previous quarters. The group’s earnings and revenue contributions remain crucial to the broader market’s performance.

Defense Stocks Surge Amid Increased Military Spending

The recent surge in European defense stocks can be attributed to the growing global military spending and heightened geopolitical tensions. The moves came after NATO Secretary General Mark Rutte said over the weekend that members must spend “considerably more than 3%” of their GDP on defense.

The target for NATO member spending is currently 2% of GDP, though U.S. President Donald Trump has said that allies should commit to 5%. He has made it clear that European countries should shoulder more of the burden for the continent’s security.

Global military spending reached a record $2.46 trillion in 2025, driven by geopolitical conflicts, rising security threats, and advancements in warfare technologies.  The United States leads with $895 billion in defense spending, followed by China ($266.85 billion), Russia ($126 billion), and India ($75 billion).

Source: Moneyweb, RMB

Finance Minister Enoch Godongwana’s much-anticipated budget speech was postponed to March 12 after an extended cabinet dispute. The budget’s rejection centered on the controversial, now-shelved proposal to raise VAT by two percentage points—a move criticized for its potentially regressive impact on the country’s poorest households.

The government raises an array of taxes and can even introduce new taxes, but there are really only three areas (excluding VAT) where big money can be raised at short notice.

1. The first is an increase in company tax. At a rate of 27%, the (dead) budget provided for R325bn from this source. Assuming that there is neither a negative impact from a higher tax rate nor a negative feed-through effect on businesses, an increase of five percentage points to 32% in company tax would raise R60bn.
2. Second, the budget reports revenue of R800bn from personal income tax. On the implausible assumption that higher taxes have no negative impact on revenue, an income tax surcharge of 7.5% on South Africa’s 7.9-million personal income taxpayers would raise R60bn.
3. Lastly, the government could borrow an additional R60bn. This would increase the deficit before borrowing from R353bn to R413bn, equal to 5.2% of GDP, rather than 4.4% as in the proposed budget. An additional borrowing requirement of R60bn would also increase total government debt from R5.9 Trillion (76.1% of GDP) to R6 Trillion, or 76.9% of GDP.

To recap: ever since 2008, the government has been spending more and more and running up its debts to do so. Although the IMF thinks the safe debt level for a country like South Africa is to owe not a cent more than 60% of GDP, the debt stands at just over 76% of GDP. Even the ANC has become extremely nervous about letting it go any higher for fear of the Big Bad Wolf waiting around the corner. The Wolf is, of course, the IMF: if the debt becomes unpayable, South Africa will have to apply for an IMF bail-out, and the terms of such a bail-out would undoubtedly mean ditching most of the ANC’s economic policies. Such an outcome would signal the definitive failure of the ANC and the conclusive end to its National Democratic Revolution.

The problem is that the ANC’s economic policies are so inimical to growth that the South African economy is hardly growing. However, the ANC runs a vast patronage state, and all its beneficiaries, in every direction, keep pushing for more expenditure. The state-owned industries (SOEs) employ vastly more people than they should, and all lose money thanks to mismanagement and corruption. So, there is enormous and continual pressure for prominent state bail-outs of the SOEs.

All the major cities and towns run by the ANC are in a state of ruin with power cuts, water cuts, and collapsing infrastructure. The main reason for this is that local ANC elites employ vast numbers of their friends and relatives on those city payrolls, and there is runaway corruption. But, again, the state is under tremendous pressure to bail out these cities and pay some of their outstanding (and tremendous) debts.

Chart 4: JSE ALSI 12-month forward P/E ratio

Source: RMB

Prosus in R79bn megadeal to buy Eat Takeaway.com

Naspers-owned Prosus has taken another swing at acquiring one of Europe’s largest food delivery businesses, Eat Takeaway.com, succeeding with a R79bn deal to create a leading food delivery platform on the continent. Operating in 17 international markets, Eat Takeaway.com connects about 61 million customers with more than 356,000 local partners. Prosus is trading on a PE ratio of 24x.

Chart 5: Prosus discount to NAV

Source: IMF, RMB

Introducing the Investec Eurostoxx 50 Rand Autocall

We are excited to introduce a new structured product—a 5-year autocall linked to the Eurostoxx 50 index. This investment offers a potential return of 14% per annum in rands, provided the index is flat or positive on the call date. The first call date is set for February 28, 2028.

Share of the month: Tencent

DeepSeek, a Chinese AI startup founded in 2023 by hedge fund manager Liang Wenfeng, has emerged as a disruptive force in the artificial intelligence industry. In January 2025, the company launched its first large language model, DeepSeek-R1, which quickly gained attention for its exceptional cost efficiency—it is reported to be 20-50 times cheaper than comparable models from OpenAI while delivering similar or superior performance.

The release of DeepSeek-R1 sent shockwaves through global equity markets, triggering a $1 trillion+ sell-off, as investors feared a significant shift in AI leadership away from Western tech giants. Even Nvidia, a key supplier of AI training chips, saw its stock decline by roughly 20% following the launch, reflecting concerns over potential disruption to the industry’s existing power structures.

Tencent: AI integration, business strength, and growth prospects

Tencent is integrating DeepSeek’s artificial intelligence model into WeChat, China’s leading super-app with over 1.4 billion monthly active users globally as of 2024. This integration enables WeChat users to directly access AI-driven features such as intelligent search and conversational assistance within the app. Tencent is also exploring DeepSeek’s integration into other products, including Tencent Cloud AI Code Assistant and Tencent Yuanbao. The company is also developing its AI reasoning model, Hunyuan, to complement DeepSeek’s technology.

Tencent’s core business segments

As a leading Chinese multinational technology conglomerate, Tencent operates across several key sectors:

1. Online games – Tencent is a dominant global player in gaming, with blockbuster titles like Honor of Kings, PUBG Mobile, and League of Legends contributing a significant share of revenue.
2. Social networks – The company operates WeChat, one of the world’s largest social media platforms, and generates revenue through advertising and value-added services.
3. Online advertising – Leveraging its vast user base and AI-driven advertising solutions, Tencent provides highly targeted marketing opportunities for businesses.
4. Fintech & business services—Tencent’s financial services, including WeChat Pay, cloud computing, and enterprise solutions, contribute to long-term growth.

Growth drivers and outlook

Tencent’s diversified business model and leadership in multiple sectors position the company for sustained expansion:

• Gaming leadership—The gaming segment saw 16% YoY revenue growth in Q4 2024, with a strong pipeline of new titles and international expansion opportunities.
• AI & innovation – Tencent is investing heavily in AI, with its proprietary Hunyuan model delivering performance on par with Meta’s Llama 3.1. AI-powered solutions are expected to enhance advertising, cloud services, and overall business operations.
• Fintech & cloud expansion – Tencent’s fintech and cloud businesses offer strong upside potential, capitalizing on its vast user base and technological capabilities.
• Strategic investments – Tencent holds stakes in major gaming companies like Epic Games, Riot Games, and Activision Blizzard, benefiting from global industry trends.

 Valuation

Our discounted cash flow (DCF) analysis estimates Tencent’s intrinsic value at $90, significantly above its current market price of $61.53. This indicates undervaluation and a compelling buy opportunity for long-term investors.

Despite trading at a P/E ratio of 24x, higher than its 5-year average of 20x, Tencent’s robust revenue and earnings growth, driven by AI advancements and cloud expansion, support a positive long-term outlook. With a diversified revenue stream spanning gaming, advertising, fintech, and cloud computing, Tencent remains well-positioned to capitalize on China’s evolving digital economy.

Chart 6: Company financials

Source: Company financials, SBG Securities estimates

Graph of the month: The 15 largest defence budgets in the world

Source: Visual Capitalist

In Lesson 15, Don’t Follow the Herd, Morgan Housel warns against the dangers of herd mentality in finance. Just because a large group of people is investing in a particular asset, following a trend, or engaging in a financial practice doesn’t mean it’s the right choice for you. Unthinkingly following the crowd can lead to irrational decision-making, bubbles, and financial losses. Instead, investors should make decisions based on their own goals, risk tolerance, and financial situation.

Housel highlights that financial markets are often driven by emotion. When a particular stock, asset class, or trend gains popularity, excitement and fear of missing out (FOMO) can drive prices higher than fundamentals justify. Conversely, when fear sets in, people panic and sell, sometimes at deep losses. History has seen many examples of herd behavior leading to market bubbles—such as the dot-com bubble in the early 2000s and the cryptocurrency frenzy in recent years. Those who invested without understanding the underlying value of their investments often suffered significant losses when the bubble burst.

A key takeaway from this lesson is the importance of independent thinking. Every investor has different financial goals, time horizons, and risk appetites. What works for one person may not be suitable for another. For example, a young investor with a long-term outlook may benefit from investing in stocks during a downturn, while a retiree relying on their portfolio for income might need a more conservative approach. Making decisions based on personal financial needs rather than trends ensures a strategy that aligns with one’s objectives.

Housel also points out that short-term market noise and media hype often fuel herd mentality. Sensational headlines, social media trends, and financial influencers can amplify speculative behavior, making certain investments seem like “sure bets.” However, successful investors focus on fundamentals, historical data, and long-term value rather than reacting to short-term excitement. Avoiding impulsive decisions based on popular sentiment helps protect against major financial mistakes.

One way to counter herd mentality is to develop a disciplined investment strategy. Having a well-defined financial plan, setting clear investment goals, and following a long-term strategy help investors stay focused during periods of market euphoria or panic. Practices like diversification, dollar-cost averaging, and sticking to a balanced asset allocation can help maintain stability and prevent rash decisions driven by the crowd.

In conclusion, Don’t Follow the Herd teaches that independent financial decision-making is crucial to long-term success. Just because others are investing in a certain way doesn’t mean it’s the right choice for you. By focusing on personal financial goals, maintaining discipline, and resisting emotional impulses driven by market trends, investors can make more rational and informed choices—avoiding the pitfalls of following the crowd.