April 2025 Newsletter

Highlights of this month’s newsletter:

“The benefits of a tariff are visible. Union workers can see they are “protected”. The harm which a tariff does is invisible. It’s spread widely. There are people that don’t have jobs because of tariffs but they don’t know it. “

– Milton Friedman

Market overview: performance figures (%)

Source: Edmond de Rothschild, 03/03/2025

Source: Edmond De Rothschild

US President Donald Trump’s trade wars are dimming the outlook for the global economy, leaving fund managers bracing for an extended period of uncertainty and positioning portfolios for new trade and political dynamics.

This is playing out in reduced forecasts for economic growth in the United States and countries already targeted by Trump’s trade policies. Tariffs are seen as likely to raise inflation, complicating the job for central banks looking to lower rates to support economic growth. Back-and-forth headlines are creating uncertainty, spurring caution among investors facing an extremely difficult-to-predict economic outlook.

Chart 1: United States policy uncertainty

Source: Macrobond

Year-to-date, European equities have outperformed their U.S. counterparts, marking a significant reversal of the long-term trend. Several key factors have contributed to this shift:

1. Declining optimism in the U.S.

Investor sentiment in the U.S. was constructive following President Trump’s election, as markets anticipated strong economic support, particularly for smaller companies. However, this enthusiasm has waned due to increasing policy uncertainty.

• Consumer sentiment has reverted to pre-election levels.
• U.S. policy uncertainty is at record highs, with markets uncertain about Trump’s next moves.
• Concerns over U.S. and global economic health have intensified, with the Federal Reserve lowering its GDP growth forecast to 1.7% for the year, down from 2.1% in December.
• Fed Chair Jerome Powell has warned that tariffs are complicating the inflation outlook.

2. European equities trading at a discount

The Euro Stoxx 50 index has been trading at a significant discount compared to the S&P 500. Historically, investors have favoured U.S. markets due to its superior earnings growth potential.

The chart below illustrates the price-to-earnings (P/E) multiples across various regions before the recent market sell-off. U.S. equities commanded higher P/E multiples, reflecting greater investor optimism about their growth prospects. However, Trump’s recent actions have introduced uncertainty, leading to a shift in market sentiment and increased caution among investors.

Chart 2: Valuation relative to peers and history

Source: Bloomberg

3. Relative market size of the United States market

The size of the U.S. market has a disproportionately large impact on European equities. A reallocation of just 1% of the U.S. market into the Euro Stoxx 600 would result in a 4% impact on the Euro Stoxx 600, highlighting the relative scale difference between the two markets.

4. Increased EU spending on defense and infrastructure

The European Commission has unveiled ReArm Europe, an €800 billion defense investment initiative. Additionally, Germany’s new coalition government has reached an agreement to implement a €500 billion infrastructure package over the next decade, alongside a minimum annual defense budget of €120 billion. The proposed removal of the debt brake rule will further facilitate these fiscal expansions. Evidence of this shift is already visible—defense contractor Rheinmetall has reported an order backlog five times its current annual revenue, reflecting increased defense spending.

Is it time to decrease exposure to the United States meaningfully?

Over the past 17 years, earnings per share (EPS) for the MSCI U.S. Index have increased 2.8 times, compared to just 1.2 times for the MSCI All Country World Index (excluding the U.S.). This significant disparity in earnings growth justifies the higher price-to-earnings (P/E) multiple of U.S. equities. In general, a company which grows faster than its peers is expected to command a higher valuation.

A potential resolution of global trade tensions would likely have a broadly positive impact on equity markets worldwide, rather than benefiting only European stocks.

Given the elevated valuations of U.S. equities, performance tends to be more volatile. However, historical trends indicate that market corrections often create compelling buying opportunities. Notably, following a spike in the VIX—a widely used measure of market volatility and investor sentiment—the S&P 500 has, on average, delivered a return of 15% over the subsequent six months.

Chart 3: Performance of the S&P 500 after a VIX of 35 since 1990, in %

Source: Edmond de Rothschild, Bloomberg

The S&P 500 followed a similar pattern in 2019 during Trump’s first term, where initial optimism faded, giving way to uncertainty and fear. However, as investors recognized that tariffs were largely being used as a negotiation tactic, market sentiment stabilized and confidence returned.

While past trends are not a guarantee of future outcomes, it is reasonable to expect that Trump will prioritize economic growth and stock market performance during his presidency, as these are key measures of his administration’s success.

Chart 4: S&P 500 performance during the tariff war (2019 vs 2025)

Source: Edmond de Rothschild, Bloomberg

Summary

We recommend staying invested, as we believe Trump’s use of tariffs is primarily a negotiation strategy. While this has introduced short-term volatility, it also creates opportunities to invest in high-quality companies at more attractive valuations.

We continue to advocate for a diversified portfolio. While U.S. companies—particularly in the technology sector—have delivered strong performance and are expected to continue doing so, we see compelling investment opportunities globally. In particular, we maintain a positive outlook on European equities, especially in the defence and infrastructure sectors, where increased government spending is likely to drive long-term growth.

Chart 5: CNN Fear and Greed Index

Source: CNN Business

“Tariff policy beneficiaries are always visible, but its victims are mostly invisible. Politicians love this. The reason is simple: The beneficiaries know whom to cast their ballots, and the victims don’t know whom to blame for their calamity. “

– Walter E. Williams

Source: Moneyweb, RMB

Year-to-date, the South African equity market has seen solid performance, with the Top 40 index up approximately 9% and the MSCI South Africa index gaining 7%. However, the returns have been heavily concentrated. In the case of the Top 40, nearly 90% of the gains can be attributed to just six stocks, predominantly from the gold, information technology, and luxury goods sectors. This suggests that the rally has been driven less by broad-based strength and more by a narrow group of outperformers.

Two dominant themes are driving these returns. The first is the so-called “debasement trade,” where investors seek refuge in hard assets like gold amid concerns over currency weakening. The second is earnings momentum, with Bloomberg estimates indicating that earnings per share (EPS) growth this year will be strongest in mining, IT, and personal goods—sectors that align closely with the top contributors to market performance so far.

Interestingly, while banks are expected to deliver robust EPS growth of around 20% for the year, their share prices have lagged, showing a negative return of 2.3% YTD. This disconnect suggests the potential for a catch-up trade, as valuations appear misaligned with earnings fundamentals. On the other hand, sectors such as paper, tobacco, and telecoms are showing negative EPS growth, reflecting their weaker stock performance.

When looking at the stocks with the most substantial three-month EPS momentum, the leaders are again found in the precious metals, luxury, and technology sectors, along with one standout insurer, OUTsurance. In contrast, the stocks with the weakest earnings momentum are mainly in the non-precious mining and industrial sectors, including names like Aspen and Woolworths. This divergence reinforces the current market dynamic, where investors are favoring companies with strong earnings visibility and upward revisions while avoiding those facing earnings pressure or structural challenges.

Chart 6: JSE Top 40 return attribution YTD – which sectors contributed to the Top 40’s 8.8% year to date return?

Source: RMB

No clear path to pass the budget yet

Opposition parties are stalling on their support, demanding that the ANC rethink Godongwana’s VAT increase. The final stretch of the national budget seems all uphill for finance minister Enoch Godongwana and his colleagues in the ANC, who are now looking to Deputy President Paul Mashatile to persuade unwilling opposition parties to vote for it.

Only 1,051 companies in South Africa are responsible for paying 72.3% of the country’s corporate income tax, highlighting the narrow tax base and the crucial role of large enterprises. Corporate income tax is the third-largest revenue generator, expected to contribute R331 billion in the 2025/2026 financial year, following personal income tax (R811 billion) and VAT (R500 billion).

Efforts to raise corporate income tax to increase revenue would be counterproductive. Finance Minister Enoch Godongwana and economist Dawie Roodt warn that higher tax rates would reduce revenue, harm investment, and drive companies away, as corporate taxes are already high compared to peer countries. Declining corporate profits, exacerbated by logistical and electricity challenges, limit potential tax increases.

Chart 7: 0.09% of South African companies pay 72.3% of all corporate income tax

Source: BusinessTech

Boosting infrastructure and digital growth: World Bank and Microsoft deepen investment in South Africa

South Africa has secured a significant boost for its cities through a new R55 billion agreement with the World Bank. The funding will support municipalities like Johannesburg, Durban, and Cape Town that meet specific performance targets in delivering essential services such as water, sanitation, electricity, and solid-waste processing. According to the World Bank, the initiative introduces a new model of “targeted, performance-based fiscal transfers,” marking a shift towards more accountable and results-driven local government financing. This is a positive development for fixed investment in the country, especially at a municipal level, where infrastructure upgrades are urgently needed.

In a further vote of confidence in South Africa’s long-term prospects, Microsoft has significantly deepened its investment in the country. Over the past three years, the global tech giant has invested over R20 billion in local data centers, increasing its total commitment to R25.8 billion. The company plans to spend an additional R5.4 billion by the end of 2027 to expand its cloud and AI infrastructure, citing growing demand for Azure services in the region. This investment strengthens South Africa’s digital backbone and signals rising interest from global firms in the country’s tech ecosystem.

Share of the month: Visa

Visa’s origins date back to the late 1950s, when the first Bank of America credit cards were introduced. As credit card usage expanded, the need for broader collaboration among issuers led to the creation of the Visa brand in 1976. Today, Visa operates in more than 200 countries and territories, serving over 50 million merchants and partnering with approximately 14,500 financial institutions. It stands as one of the world’s largest and most trusted payment networks.

Visa has been a significant beneficiary of the global shift toward digital payments. Like other leading networks, Visa benefits from a powerful network effect: the more consumers who use the platform, the more appealing it becomes to merchants, which in turn attracts more consumers. This self-reinforcing cycle has allowed a small number of networks—chief among them Visa—to dominate the electronic payments space.

In fiscal 2024, Visa processed more than $13 trillion in purchase transactions. According to the Nilson Report, it holds over 50% of the market share by purchase volume in key regions, including the United States, Europe, Latin America, and the Middle East/Africa. Visa also handles roughly twice as many transactions as its closest competitor, Mastercard, solidifying its dominant position. We believe the scale, reach, and embedded nature of Visa’s infrastructure make it nearly impossible to replicate in the foreseeable future.

Visa has also been shareholder-friendly, returning 87% of its free cash flow over the past three years through dividends and share buybacks.

Valuation and Growth Outlook

While Visa experienced a temporary slowdown during the early stages of the pandemic—mainly due to reduced cross-border activity—growth has since rebounded and even exceeded historical norms. In fiscal 2024, growth began to normalize, aligning with pre-pandemic levels. However, the ongoing migration toward electronic payments, especially in underpenetrated emerging markets, should continue to support robust growth.

We forecast gross and net revenue to grow at compound annual rates of 10% and 9% over the next five years. International expansion is expected to be a key driver as these markets contribute a growing share of volume.

Although gross margins were under pressure during the pandemic and have recently been affected by higher client incentives, the business remains highly scalable. The rebound in higher-margin cross-border transactions has supported recent margin recovery. We project operating margins (based on gross revenue) to improve modestly from 48% in fiscal 2024 to 49% by 2029.

Chart 8: Visa’s 5-year share price (+90%)

Source: Morningstar

Chart 9: 12-month forward P/E

Source: Julius Baer

Chart 10: Earnings per share versus performance

Source: Julius Baer

Chart 11: Company financials

Source: Julius Baer

Graph of the month

Source: Charlie Bilello

In Chapter 16 of The Psychology of Money, Morgan Housel highlights an often-overlooked truth: simplicity in financial decision-making is usually more powerful than complexity. In a world constantly bombarded with new investment products, high-frequency trading strategies, and jargon-filled advice, it’s easy to believe that success in finance requires complexity. But Housel argues the opposite—the most effective strategies are often the simplest ones.

Simplicity is valuable because it’s sustainable. A simple plan is easier to understand, stick to, and execute consistently, especially during uncertain or market volatility. For example, consistently investing in a diversified portfolio, living below your means, and staying invested over the long term may not sound glamorous—but history shows these essential habits often outperform complex, active strategies that try to beat the market. Simplicity reduces the chance of emotional or panicked decisions and helps investors stay the course when it matters most.

Another reason simplicity works is because it removes the illusion of control. Complex strategies may feel sophisticated, but they often involve chasing alpha, trying to outguess the market, or timing highs and lows—all of which carry a high probability of error. Simple, rules-based approaches—like buying and holding low-cost index funds or automating savings—acknowledge the unpredictability of markets and focus on long-term wealth building instead of short-term wins.

Housel emphasizes that simplicity doesn’t mean easy. It takes discipline and patience to follow a straightforward plan, especially when others around you are chasing flashy trends or getting rich quickly (or so it seems). But resisting the temptation to overthink or overengineer your financial life is a powerful edge. Simplicity is not a lack of intelligence—it’s a mark of clarity and humility.

In conclusion, the value of simplicity lies in its ability to help you make good decisions consistently over time. Rather than complicating your financial life with elaborate plans or overreacting to every market movement, sticking with a clear, understandable, and repeatable strategy is often the best path to long-term success. As Housel reminds us, the goal isn’t to be the most intelligent person in the room—it’s to make choices you can live with for decades.