Looking beyond trade wars and extreme market chaos 

If an investor fell into a coma at the end of March and only re-emerged at the end of June, a glance at closing stock market levels would suggest nothing but good news. Both the MSCI World Index and the S&P 500 were up 11% in US dollars at the end of the quarter. However, there was a wild ride in between. Over the four days after Donald Trump announced sweeping tariffs in early April, the S&P 500 fell 12%. A subsequent pause in implementation saw the index recover all its losses by 2 May, only to power ahead 25% from the Liberation Day bottom. Both the MSCI World Index and S&P 500 ended the second quarter at all-time highs, indicating the stock market volatility in 2025.

Keeping an eye on developments in the US 

We have yet to see where the final US tariff proposals will land. Current estimates put the effective forward rate at the highest level since the 1930s. At the peril of trying to read Trump’s mind, the problem he is trying to fix is a real one. The United States’ share of global consumption is almost double its share of global production – an outlier compared to most regional blocs. The US also has a growing fiscal deficit that must be funded. 

There are, however, reasons to be concerned. Firstly, policy uncertainty is usually not supportive for private sector capital investment. One faces a sharp headwind to maintain strong growth in such an environment (South Africa is an unfortunate case in point here). Secondly, US companies will bear the burden of the tariffs and have a choice: they can either pass on those higher costs to consumers via higher prices, or they can absorb them into their margins. The former is not conducive to low and stable inflation (something we thought was at risk even before the tariff announcements). The latter is not good for company earnings. 

The S&P 500 trades on 22 times forward earnings versus the MSCI World ex-US on 15 times; using this alone to conclude the US is expensive, is lazy. US companies deserve a premium rating, as they have grown faster with lower earnings volatility and higher cash conversion. However, what worries us is 1) the S&P 500’s rating is more than 40% above its own history, and 2) earnings expectations are high despite the risks discussed above.  

Local markets weather the storm 

In South Africa, things were even more extreme. The FTSE/JSE All Share Index (ALSI) fell 9% two days after 2 April, fully recovering over the next eight days and marching to an all-time high in mid-June (a 20% gain from the Liberation Day bottom). A sharper recovery was aided by the precious metal shares (up 14% over the quarter, making up 17% of the ALSI). 

If we are to ease our social and economic challenges, South Africa needs to grow real GDP meaningfully. The key internal enablers of this remain missing: The GNU is tenuous, capital investment is stagnant, and infrastructure performance is still subpar. The weakening global growth environment makes a turnaround much harder. 

We remain positioned for the long term 

The Allan Gray Equity Fund’s positioning is tilted offshore, particularly towards the defensive rand hedges. AB InBev is a great example of such a share. Beer is winning share of throat, the company has pricing power from strong brands and consumers trading up, there is material scope for earnings to grow and, most importantly, we can buy it for a reasonable price.  

Given the uncertain environment, we are focused on absolute returns and protecting client capital, as we have done consistently through different market cycles.