As I write to you, we have just passed the halfway mark of the year, and what a year it has been thus far.
In the last note, it was highlighted that the build-up of US military presence in the Middle East was likely to be the precursor to some form of military action, and this proved to be the case. We have recently seen an apparent end to hostilities, but it feels shaky at best. While views differ significantly on what was achieved, what we do know is that we saw oil prices spike for a period, we saw inflation start to creep into the global economy and we saw material changes to interest rate expectations across the globe. While oil prices have dropped significantly since the official ceasefire (down by 30% from peaks), it remains to be seen whether the ceasefire holds, and whether the inflation that came into the system is lasting or transitory (we have heard that phrase before!).
While time will tell, there are some takeouts that are worth considering.
One would have expected markets to have been significantly more concerned around a conflict that has/had the potential to significantly impact inflation. Yet markets didn’t seem to be too fazed. After an initial sell off, global markets bounced and assaulted all-time highs despite what has traditionally been a massive driver of markets – a quick and unexpected change to interest rate expectations. While causality is a complex and multifaceted phenomenon, much of what we have seen is linked to the interest and euphoria we are seeing around AI – whether in AI companies themselves, semiconductor and electronics markets, or even some downstream industries that markets believe will benefit from what comes next. The question is, “But what comes next?” and this is where it gets tricky.
Markets are pricing in and expecting translation from unprecedented levels of investment into revenue and profit and are willing to pay for this. We saw the recent listing of Space X and it speaks to the appetite that markets have. For a brief period, Space X touched a valuation of USD 3 trillion, pushing its market cap above Amazon and Microsoft. If one considers the following, one can see what markets are willing to buy into:
- Amazon generated $91 billion in net income on $743 billion in sales.
- Microsoft generated $125 billion in net income on $318 billion in sales.
- SpaceX generated a $9 billion net loss on $19 billion in sales.
When one considers Space X’s mission statement, “to build the systems and technologies necessary to make life multiplanetary, to understand the true nature of the universe, and to extend the light of consciousness to the stars”, we can see that markets are willing to pay a huge amount for an uncertain future (in fact for something that doesn’t exist). To be clear, this isn’t to say that Space X can’t change the world and be highly successful but rather that markets have an appetite for risk that we have seldom seen before.
The risk here is around expectations and whether they are priced correctly as opposed to whether AI, or the broader tech boom, is real. I saw a great quote from Duane Cable at Ninety One recently that succinctly sums things up:
“Jeremy Grantham, one of the great students of market cycles, makes a point worth considering: every significant technological breakthrough tends to follow the same pattern. Genuine innovation, massive capital inflows, overcapacity, and then a repricing. The technology survives. Investors who paid for perfection often do not.”
We are starting to see market concentration reminiscent of previous booms and busts. As examples (end of June data), on the Nikkei, 65% of the return this year has come from 10% of the stocks – dominated by semiconductor and electronics manufacturers, and technology now accounts for 47% of the S&P 500 index. Extremely narrow leadership is being seen – 80% of returns driven by 6% of stocks (semiconductors & hardware) on the S&P500.
The Latin saying “Caveat emptor” comes to mind. “Let the buyer beware”.
The second observation which is worth touching on is around South Africa and the behaviour of its market and currency. 2025 was a year where we saw a resurgent and resilient Rand, an incredible run for the JSE ALSI and a rerating of SA Bonds. While South African investors were relieved to finally get a tail wind, we noted that much of what we are seeing was as a result of external factors. A virtually unprecedented run in the gold price, a big jump in PGM’s, and significant dollar weakness all played a bigger role than some might think. The Iran war highlighted that SA is in many ways a “price taker” in these matters. Gold came off by nearly 25%, platinum by 40%, and we have seen the JSE ALSI retract by some 15%. Interestingly though, it hasn’t bounced back in the same way that Global markets have. Inflation has very much been in the SARB target band, and the SARB had started talking about moving away from a range to a specific target. As the ZAR weakened and oil prices shot up, inflation came back into the SA economy through the fuel pumps, and we saw an interest rate increase in short order to try and reign the inflation in. The ZAR also had a moment, falling from R16/$ all the way to the R17,30 level in a very short space of time. While it has recovered from this level on the back of some form of resolution in the Middle East, it has been whipped around and is clearly taking direction from sentiment around risk as opposed to its fundamentals. With Municipal Elections, Phala Phala fall out, and then National Elections in the not-too-distant future, offshore exposure as a diversify and risk mitigator is still a key part to any portfolio.
Good luck for the second half of the year. With US midterm elections around the corner and a new Chair of the FED, the US is likely to be interesting. Municipal Elections beckon in South Africa, and while, given the state of affairs in many major cities, it seems logical that voters will want change, politics is a dirty sport, so expect some fireworks.
