Global markets began the year on a constructive footing. Accommodative fiscal and monetary policy across most regions is helping buoy economic growth and drive-up equity valuations. The MSCI World rose 2.3% (in USD) in January, whilst South African equities outperformed global peers, with the ALSI rising 3.7%, underpinned by continued strength from PGMs and Gold.
Metals momentum
Precious and industrial metals extended their upward trend during the month. The drivers of this price surge remain firmly in place: weaker US dollar, ongoing central bank diversification, expanding fiscal deficits and heightened focus on resource security. However, price action is getting steamy with price momentum, especially in gold, becoming increasingly elevated. Determining a fair value for gold is inherently challenging, but at current levels, it now trades about 100% above its inflation-adjusted peaks of 1980 and 2012. We think a meaningful portion of the positive drivers is already priced in.
Forecast deficits in the PGM market are significant and were further increased by Norilsk’s downgrade to its palladium supply outlook. While the PGM basket price move has been significant, valuations appear less stretched than gold. In base metals, copper assets continue to attract strong interest, as highlighted by Rio Tinto’s approach to Glencore, given the undervalued copper assets. Copper miners are attracting sizable valuations given the unavailability of new supply and insatiable demand from the new economy, including electrification (Electric Vehicles), data centres and renewable energy.
United States: strong growth, softer dollar
US aggression toward its allies has compounded the dollar’s continued slide. Given the still-elevated level of the trade-weighted dollar, widening US deficits, and the increasing need for central bank reserve diversification, this trend appears set to persist. The US economy remains robust with consumption at a healthy level, albeit increasingly supported by household dissaving.
Technology investment remains a key growth engine. Analysis and research for hyperscalers remain dominated by efforts to understand the return on Artificial Intelligence (AI) investment.
South Africa: supportive start
Locally, the rand strengthened over the month, and long-dated bond yields rallied to 8.2%. Lower bond rates have supported a re-rating of domestically exposed shares, especially where earnings expectations remain resilient. Corporate loan growth at banks remains strong, while retail loan growth, previously flat, shows early signs of recovery. In contrast, the retail sector remains under pressure, with weak earnings updates reflecting subdued volumes and weak pricing power. This may well be partially due to new market entrants and gambling continuing to take share from consumers’ discretionary income.
Our portfolios retain a healthy exposure to metals, although gold holdings have been reduced in light of valuation considerations. We maintain an overweight position in financials where earnings certainty appears good, and valuations are attractive. Rand hedges and dual-listed stocks are offering compelling value, and we are gradually increasing our exposure to these counters, taking advantage of rand strength.
