Most regions continued to generate reasonable growth in October despite heightened trade and political tensions. Composite PMIs for major economies, including the US, Eurozone, Japan, China and Emerging Markets, remain in expansionary territory.
The US is expected to deliver approximately 1.9% GDP growth over the next two years, underpinned by significant AI-related capital expenditure, which is offsetting weakness in the labour market. The muted jobs picture, coupled with a continued reduction in inflation (albeit gradual), should permit further Federal Reserve interest rate cuts, thereby supporting the global easing cycle.
The dollar has strengthened from oversold levels but is likely to weaken over the long term due to its overvaluation relative to other currencies on a purchasing power parity basis. Rising US debt levels remain a medium-term concern. These two factors, together with more reasonable valuations outside the US, mean we find ample opportunities for equity exposure in other markets. Furthermore, concentration risk in US equity markets remains high.
AI Bubble Concerns
The likelihood of a bubble in AI-themed stocks is being raised with increasing frequency. Many high-profile research thinktanks have produced back-of-the-envelope calculations suggesting that extremely optimistic assumptions are being priced into current valuations. Data centres and AI engines are far from break-even, let alone generating adequate returns on capital. The profitability of some semiconductor companies is extremely high but vulnerable to competitor technology developments. Vendor financing arrangements, whereby profitable chip companies extend credit to loss-making AI ventures, add further concern. History suggests that transformative technologies, such as railways and the internet, ultimately benefited the broader economy rather than the first movers.
As is often the case, identifying the makings of a bubble is easier than determining the catalyst that will cause it to “pop.” We remain cautious on US names exposed to the AI hype. Even non-US stocks with AI exposure, like Samsung and TSMC, are becoming expensive.
Although most US companies reporting results are beating expectations, the bulk of the S&P500 upward earnings revisions are driven by large-cap technology stocks. Equal-weighted S&P 500 earnings forecasts remain stable. Valuations for most regions outside the US are modestly above long-run medians, while the US market, particularly AI-themed stocks, remains expensive.
Industrial metals shine
Precious metals retreated somewhat in October, making way for a rally in industrial metals. We maintain a constructive long-term view on gold underpinned by Central Banks’ ongoing diversification away from the dollar. However, by mid-October, gold’s rally had accelerated aggressively without a whisper of bearish sentiment, whilst gold miners had comfortably outperformed the gold price. We felt a consolidation was due and reduced our gold holdings. We remain constructive on base metals, such as copper, given expectations of rising deficits.
South Africa inching forward
The structural story is slowly progressing. Coal volumes reached a new post-2021 high as Transnet’s improvements began to bear fruit. And finally, after 2 years and 8 months on the FATF grey list, South Africa was removed in October. This is a meaningful step forward for investor confidence, providing improved access to international financial systems and reduced compliance costs for local banks. It is also positive for foreign investment flows.
Looking ahead, the short-term outlook for South Africa remains constructive. Gross tax revenue growth is running at 8.5% year-on-year on a 12-month rolling basis, ahead of National Treasury’s 7.1% budget estimate. Corporate income tax is expected to remain buoyant for the remainder of the year, supported by elevated commodity prices. This stronger fiscal performance is likely to enable Treasury to improve on its 0.8% primary surplus estimate for the FY25/26 tax year in the upcoming Medium-Term Budget Policy Statement.
The country’s terms of trade remain favourable, underpinned by high precious metal prices and subdued oil prices. Combined with anticipated US rate cuts, these dynamics should support the rand and South African bond yields, in turn benefiting local equities. Within the equity market, financials are seeing stable to positive earnings upgrades, in contrast to the retail sector, and we have positioned our portfolios accordingly.
Our focus remains on identifying pockets of value across markets and capitalising on South Africa’s recent improvements, while exercising caution around AI-related speculation where optimism has outpaced fundamentals. This disciplined, diversified approach positions our portfolios to benefit from multiple market scenarios as we close out 2025.
