February 2026 Newsletter

Highlights of this month’s newsletter:

““Heroes may not be braver than anyone else. They’re just braver five minutes longer.“

— Ronald Reagan

Market overview: performance figures (%)

Source: RMB

Source: Edmond de Rothschild

After a robust start to the year, investor focus is shifting toward corporate earnings and the broader macroeconomic landscape. This newsletter examines the potential impact of the US midterm elections, the ongoing AI investment cycle, and the outlook for developed and emerging equity markets. Additionally, we analyze the continued strength of gold as a strategic asset.

1 – Market commentary: US midterm elections

The upcoming US midterm elections represent a significant event for global markets. Interestingly, expectations for a Republican sweep have risen recently, bottoming out shortly after the S&P 500 reached its own low.

Historically, midterm election years have been characterized by volatility and weaker performance for the S&P 500. However, the post-election period often brings policy clarity that can support equity markets. We continue to monitor these political developments for their potential impact on asset allocation.

2 – Earnings outlook

Looking ahead to Q4 2025, if historical outperformance trends hold, growth could reach +11% in the US and +1% in Europe.

Key Drivers to Watch

• The AI investment cycle: Momentum in Artificial Intelligence remains the primary market driver, particularly in the US. More than $3 trillion is projected to be invested in AI infrastructure by the end of the decade (nearly 10% of US GDP).
• Capital Expenditure (CapEx): Commentary from major cloud providers (hyperscalers) and semiconductor manufacturers, like Taiwan Semiconductor Manufacturing (TSMC), will be critical. TSMC has already raised its CapEx guidance for AI manufacturing equipment, boosting shares in the semiconductor sector (e.g., ASML, Applied Materials, Micron).
• Return on Investment (ROI): With hundreds of billions already deployed, investors are now demanding evidence of AI monetization from software companies.
• Currency: The stabilization of the EUR/USD exchange rate offers breathing room for European exporters, though tensions over geopolitical issues (such as Greenland) remain a risk factor.
• Industrials & Defense: Infrastructure projects and increased defense spending continue to drive momentum for industrial companies.

Financial health of AI majors

Leverage varies significantly across the sector. Companies like Oracle maintain higher net debt-to-earnings before interest, tax, depreciation and amortization (EBITDA) ratios, creating pressure to realize strong earnings growth from their capital expenditures. In contrast, many other direct AI plays maintain very low net debt levels, providing them with greater financial flexibility.

Chart 1: Net debt to EBITDA ratios of direct AI shares

Source: Bloomberg, JP Morgan

Chart 2: Annual capital expenditure expectations per hyperscaler 2020-2032

Source: Edmond De Rothschild

3 – Emerging markets

We maintain a constructive outlook on Emerging Markets. Emerging market equities are currently outperforming developed markets, supported by robust global growth and accommodative monetary policies.

Key Drivers for emerging market outperformance:

• Valuation & growth: Emerging economies are forecast to grow by 4.2% in 2026–27, significantly outpacing the 1.9% projected for developed economies.
• The diversification effect: Investors are actively diversifying to reduce US concentration risk. The structural disparity is massive: the MSCI US market cap is approximately $60 trillion, compared to just $10 trillion for the MSCI Emerging Markets. Consequently, even a modest 1% rotation of capital out of the US represents a substantial 6% inflow into Emerging Markets.
• Currency tailwinds: The US dollar has been weakening since late 2024. Historically, a weak dollar reduces import costs and inflation for emerging economies, allowing their central banks to cut rates—a scenario that strongly favors EM equities.
• China’s recovery: We remain constructive on China due to favorable government stimulus, increased liquidity, and the momentum of technology stocks as the country invests in technological independence.

Chart 3: Money flows into core MSCI Emerging Markets ETF

Source: Edmond De Rothschild

4 – Trade and tariffs

Although tariff tensions eased late last year, uncertainty persists regarding the Trump administration’s trade policies.

• Inventory cycles: Preemptive stock purchases seen in Q1 and Q2 2025 appear to have depleted by mid-October. We anticipate a cycle of inventory replenishment in Q4, which may now be impacted by renewed tariffs.
• Margin pressure: While net margins in the US and Europe remain historically high, there is potential downside risk for cyclical sectors that lack the pricing power to offset tariff-induced costs.

Chart 4: ISM Inventory to New Orders Index ratio, since 2020. A high ratio means that companies are accumulating inventories, while a low ratio means that they are reducing their inventories and accelerating their orders

Source: Edmond De Rothschild

Chart 5: Net margins for the S&P 500 and Stoxx 600, and expected margins through Q2 2026 (in %)

Source: Edmond De Rothschild

5 – Commodities: The case for gold

Gold has performed exceptionally well, driven by central bank diversification and geopolitical risk. Since President Trump’s appointment, we have observed a meaningful increase in gold reserves by central banks. Graph 6 also shows that ETFs contributed meaningfully to gold demand for the first time since 2020.

Why we remain bullish on Gold:

• Central bank demand: Continued accumulation of gold reserves as a hedge against the US dollar.
• Macro environment: Gold historically outperforms in environments where US CPI is above 2% during a Federal Reserve rate-cutting cycle—conditions we are currently experiencing.

Chart 6: Gold demand forecast (in metric tons)

Source: WGC, UBS

Summary

We maintain a constructive outlook on both equities and gold. In a rapidly evolving market environment, diversification remains a central tenet of our approach. Our core strategy of targeting high-quality growth companies has delivered resilient performance to date. We intend to persist with this strategy while actively diversifying into alternative asset classes, such as gold, to mitigate short-term volatility and enhance overall portfolio stability.

Source: Moneyweb, SARB

The JSE All-Share Index kicked off 2026 on a strong footing, gaining 3.6%. The standout driver has been Resources, up 13% YTD, with renewed momentum in bullion and metals producers amid gold trading at elevated levels. Importantly, a firmer rand adds a second tailwind for South Africa: it helps contain imported inflation while the mining complex still benefits from robust US-dollar commodity prices, supporting cash flows, dividends, and ultimately tax receipts for the fiscus. Although the currency’s move has been sharp, we think the broader direction could persist through 2026, even if the pace becomes more measure from here.

Index replication risk: The JSE’s commodity concentration

Given that gold and platinum group metals companies now account for between 25% and 30% of the JSE All Share Index, it is a big ask for any portfolio manager to match this concentration.

What made 2025 particularly tricky is that the index’s strong headline return was, to a large extent, a commodity price story.

Gold’s surge and the mid-year snapback in PGMs turbocharged a handful of large miners, and those outsized moves did a disproportionate amount of the heavy lifting for the broader market. In fact, some local market commentary estimates that gold and platinum miners were responsible for roughly 60% of the JSE’s 2025 performance, an unusually narrow engine room for such a large index.

That concentration is a double-edged sword. When metal prices run, the All Share can look exceptionally strong even if “SA Inc.” is merely muddling through. But it also means the index becomes more exposed to global risk appetite, the US dollar, and inherently volatile commodity cycles, factors that have little to do with the underlying health of South African consumers, banks, retailers, or domestic cyclicals. When leadership is this narrow, index outcomes can swing sharply if commodity prices normalise or reverse.

For us as portfolio managers, the practical implication is straightforward: index replication becomes a real risk-management problem, not just a tracking-error problem. A concentrated benchmark can effectively force portfolios to hold large positions in highly cyclical, price-taking businesses to “keep up”, even when the fundamental case doesn’t justify that level of exposure. It’s not surprising, then, that solutions like capped indices exist specifically to reduce concentration risk by limiting single-stock weights.

Flooded roads, billion-rand losses: South Africa counts the cost

South Africa’s January 2026 floods across Limpopo, KwaZulu-Natal and Mpumalanga prompted a national state of disaster and severely damaged transport links.

Limpopo alone has already confirmed 439 roads destroyed, with bridges collapsing and routes becoming impassable. With no official kilometer tally yet, repair requirements are being inferred from engineering benchmarks and past disasters.

Studies of flood reconstruction indicate that rebuilding a destroyed paved road typically costs about R8 million to R15 million per kilometer. Using conservative assumptions about average road-section length, Limpopo’s damage could equate to roughly 2,000–4,400 km of affected roads, implying direct road-reconstruction funding of around R16 billion to R66 billion.

The economic hit is likely larger than the repair bill. International research suggests indirect losses, higher transport costs, disrupted supply chains, reduced market access, and delayed freight, often add 50% to 100% to direct costs, lifting total economic damage to an estimated R24 billion to more than R100 billion. In provinces where agriculture, mining, and tourism depend on road access, these disruptions can suppress activity for months.

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.

A hypothetical comparison of the tax advantages using a Tax-Free Investment Account (TFIA)

To illustrate the tax advantages of a TFIA, let’s compare it to a regular taxable savings account. Below are the assumptions:

• Monthly contribution: R3,000 per month for 13 years and 10 months (166 months total), with a final R2,000 contribution in the 167th month.
• Investment returns: 11% per annum, split equally between income, dividends, and capital gains.
• Personal tax rate: 45%.

After 13 years and 10 months:

• In a TFIA, the future value of your investment would be approximately R1,133,001.
• The future value would be approximately R896,287 in a taxable account due to the tax impact on returns.

The TFIA outcome is about 26.4% higher than the taxable alternative, highlighting the power of tax-free compounding over time.

January marked a meaningful milestone for us: the one-year anniversary of the VEGA Global Strategic Fund. Over the month, the fund rose 2.9%, matching the 2.9% gain in the MSCI All Country World Index, our reference benchmark, in USD terms. Since inception, the fund has returned 20.2%, compared with 20.6% for the benchmark.

Chart 8: Total return in USD since inception

Portfolio strategy

In the wake of heightened market volatility following President Trump’s tariff announcements, our stance has been to remain disciplined and avoid reactive portfolio shifts. History consistently shows that impulsive responses to short-term political noise often result in suboptimal investment outcomes.

Instead, we have used this environment to evaluate high-quality businesses that were indiscriminately sold off despite their strong long-term fundamentals. Periods of uncertainty can create attractive entry points into quality companies at compelling valuations, and we continue to focus on identifying these opportunities with a long-term perspective.

The portfolio remains concentrated in leading global businesses with durable competitive advantages, particularly those delivering high returns on capital and robust free cash flow generation. Dividend policies are not a central consideration in our selection process, as we generally favour companies that reinvest earnings to drive future growth.

We also resist the temptation to follow short-lived market trends or fashionable investment narratives, as preserving portfolio quality takes precedence over chasing momentum.

Changes which were made during the month

Meta Platforms — Increased position

We increased our holding in Meta Platforms following continued strength in its core advertising business and improving profitability. Meta’s scale, engagement across its platforms and rapid progress in AI-driven ad tools reinforce our confidence in its ability to compound earnings over time. The top-up reflects its ongoing role as a high-conviction growth holding in the fund.

Alphabet — Increased position

We added to Alphabet as part of routine rebalancing toward our highest-conviction compounders. The company continues to execute well across Search and YouTube, while Google Cloud remains an important medium-term growth driver. With AI increasingly embedded across its product suite, we believe Alphabet is well positioned to sustain durable cash generation and long-term value creation.

Nu Holdings (NuBank) — Increased position

We increased exposure to Nu Holdings, supported by its strong customer growth and expanding product offering across Latin America. Nu’s digital-first model and disciplined underwriting continue to translate into attractive unit economics and improving profitability. We view Nu as a long-duration fintech compounder and a differentiated growth opportunity within the portfolio.

Fortinet — Reduced position

We reduced our holding in Fortinet as part of portfolio rebalancing. While we still view Fortinet as a high-quality cybersecurity business with strong product depth and an established customer base, we chose to moderate the position to align risk and weights across the portfolio and to reallocate toward areas where conviction is currently higher.

Top 10 Holdings

Monthly returns in USD net of fees

Share of the month: Zoetis

Zoetis is our top pick this month because it sits right at the intersection of two powerful trends we like: the “pets-as-family” structural shift and the growing need for efficient, sustainable protein production. It is the world’s leading standalone animal health company, discovering, developing and commercialising medicines, vaccines, diagnostics and other technologies for both companion animals and livestock, and it has been focused on animal health for more than 70 years. In other words, this is not a side business within a large pharma group – Zoetis is an animal health company, which shapes everything from its R&D agenda to its capital allocation.

From an investment perspective, the core of the thesis is a very wide moat in a structurally attractive industry. The animal health market benefits from cash-pay customers, a fragmented buyer base and relatively low development costs, which gives leading players meaningful pricing power. Zoetis has used that backdrop to build what we view as the sector’s strongest franchise: a broad portfolio that spans almost every animal health niche, from farm animals and fish (aquaculture) to high-margin pet diagnostics and novel therapies for dogs and cats. Its innovation engine is particularly impressive in companion animals, where it has launched targeted drugs for conditions such as allergies and osteoarthritis, and is expanding monoclonal antibody platforms into areas such as renal, cardiac, and oncology care. We expect the companion animal business to grow at a low double-digit rate and to make up more than 70% of group revenue by the end of the decade, supporting both growth and mix-led margin expansion.

Financially, Zoetis looks like a classic quality compounder rather than a speculative biotech story. After using debt to fund acquisitions earlier in its life as an independent company, management has steadily delevered the balance sheet: debt/EBITDA has fallen from above 5x to under 2x in seven years, with interest comfortably covered at around 13 times. The business is also becoming more profitable as it trims lower-margin production-animal lines (including the divestiture of its medicated feed additive portfolio), consolidates manufacturing and leans into higher-margin pet products. Morningstar models operating margins rising toward 40% by 2029 and long-term earnings per share growth of around 10%, supported by ongoing innovation and deeper penetration of international pet markets.

Valuation is where the story becomes particularly interesting. Morningstar’s intrinsic value estimate for Zoetis stands at $171 per share. As of late January 2026, the shares trade in the mid-$120s, implying a meaningful discount to that fair value for a market leader with double-digit EPS growth. On standard metrics, Zoetis trades at roughly 20–21 times earnings and about 15 times EBITDA, levels that are well below its historical averages and broadly reasonable for a defensive growth compounder with high returns and a long runway. The company also returns cash to shareholders through a steadily rising dividend and ongoing share buybacks, but sensibly continues to prioritise R&D and bolt-on deals where it sees attractive long-term returns.

There are, of course, risks we need to acknowledge. Pet healthcare spending proved somewhat cyclical during the Global Financial Crisis, and a deep recession combined with persistent inflation could again cause owners to defer or downgrade treatments for their animals.

In livestock, rising concern about antibiotics in the food chain and evolving dietary preferences (including reduced meat consumption and the emergence of lab-grown meat) represent long-term headwinds. Zoetis has already reduced its exposure to some of the more contentious feed-additive products and is gradually tilting its mix toward companion animals, which should help cushion these pressures over time. Overall, we see these as manageable, long-dated issues rather than thesis-breakers.

Part of what makes Zoetis exciting is the sheer depth of its intellectual property and innovation track record. The company holds more than 5,880 granted patents with roughly 1,500 more pending – around 900 more than its nearest pure-play rival – and many of its flagship pet therapies are biologics that will be difficult to copy even after patents expire.

Its brands are also genuinely trusted: products like Rimadyl, a decades-old arthritis treatment for dogs, have retained strong demand long after patent expiry because vets and owners simply stick with what works. And beyond dogs and cats, Zoetis has quietly built leading positions in niches like fish health through acquisitions such as Pharmaq and Fish Vet Group, giving investors exposure to the growing importance of aquaculture in global food supply.

Did you know?

• Zoetis started life as Pfizer’s agricultural division in the 1950s and is now the world’s largest producer of medicines and vaccines for pets and livestock?
• Did you know it has been innovating in animal health for more than 70 years and now generates over $9 billion in annual revenue, serving customers in more than 100 countries?
• And did you know that, despite this scale and pedigree, the stock today trades at only around 20 times earnings – essentially pricing this animal-health champion more like a mature pharma name than a high-quality structural grower?

Chart 9: Zoetis’s 12-month forward PE ration and PEG ratio

Source: LSEG

Chart 18: Zoetis’s share price growth versus EPS growth

Source: LSEG

In Chapter 6, Morgan Housel examines a deeply human tendency: our desire to believe we are more in control of outcomes than we really are. While planning, skill, and effort matter, Housel argues that chance, randomness, and external forces play a far bigger role in life and investing than most people are comfortable admitting.

He explains that humans are wired to seek control because uncertainty is emotionally unsettling. We prefer neat cause-and-effect explanations, where success is earned and failure is deserved. But reality is far messier. Outcomes are often shaped by timing, luck, and forces outside anyone’s control, even when we desperately want to believe otherwise.

Housel shows how this illusion of control appears everywhere. In markets, investors attribute strong returns to skill during bull markets, only to blame bad luck or external shocks when conditions reverse. In business and life, success stories are often framed as master plans executed perfectly, when in truth they were shaped by a combination of effort, chance, and being in the right place at the right time.

The danger of this illusion is not that effort becomes meaningless, but that overconfidence creeps in. When people believe they fully control outcomes, they take on too much risk, underestimate uncertainty, and assume the future will bend to their expectations. History repeatedly shows that periods of the greatest confidence often precede the greatest surprises.

Housel’s deeper point is that accepting limited control is not pessimistic, it is liberating. Once you acknowledge how much is outside your influence, you stop chasing certainty and start focusing on what actually matters: preparation, adaptability, and resilience.

Housel also highlights how the illusion of control feeds our obsession with certainty. We search for forecasts, experts, and precise predictions because they give the comforting sense that the future can be managed. But this desire often leads people to underestimate randomness and overestimate their ability to respond when conditions change. The problem isn’t planning itself, it’s believing that plans eliminate uncertainty. By recognising that control is limited, we make room for flexibility, backup plans, and humility, which ultimately leave us far better prepared for whatever unfolds.

What This Means for Investors

For investors, Chapter 6 is a reminder to stay humble. Markets are influenced by countless variables no individual can control or predict. Strong returns don’t always prove superior skill, just as poor short-term outcomes don’t always signal bad decisions.

Instead of trying to control outcomes, investors should control what can be controlled: diversification, costs, time horizon, risk exposure, and behaviour during periods of stress. Accepting uncertainty encourages better decision-making, reduces overconfidence, and helps investors stay disciplined when markets don’t behave as expected.

In the long run, success comes less from mastering the future and more from respecting how unpredictable it is — and building strategies that can survive despite that unpredictability.

“More than any other force, luck determines outcomes — and the illusion of control is what makes people forget that.“
— Morgan Housel

Source: Visual Capitalist

Sources

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

Disclaimer

VEGA Asset Management has taken care that all information provided in this document is true and correct. VEGA Asset Management does not accept responsibility for any claim, liability, loss, expense, or damage. Any information herein is not intended nor does it constitute financial, tax, legal, investment, or other advice. VEGA Asset Management is an authorised Financial Service Provider with FSP number 776. Past performance is not necessarily an indication of future performance.