A world where animal spirits are running wild is also one that has temporarily divorced from fundamentals. Experience tells us this often doesn’t end well.
The wealth transfer from Baby Boomers to their offspring, which is in full swing, has got the taxman’s full attention, especially as it pertains to capital gains payments, trust structures and potential breaches of the Tax Act’s Division 7A.
How investors can weather a ‘crisis of global integration’
With the US continuing to perform strongly and China on the cusp of stabilising its economy and boosting growth, there are signs that a global economic recovery is building.
But investors should beware the new Cold War brewing between the world’s two largest economies, with the rise of China challenging American global dominance and creating a “crisis of global integration” according to the Ninety One Investment Institute.
“My old professor Charlie Maier identified three 20th century crises: of representation, of capitalism, and of industrial society,” said Sahil Mahtani, head of macro research for the Ninety One Investment Institute. “We’ve extended his analytical framework to the current period, calling the 2020s a crisis of global integration, which revolves around the challenges of a global trading system and an increasingly global polity that is stumbling towards a new settlement.
“The conflicts in Ukraine and the Middle East are part of a broader geo-economic struggle between the US, China, and their proxies.”
While some have described that shift as “deglobalisation” – where global trade stagnates as economies of scale decline and capital flows are restricted – Mahtani believes those concerns might be misplaced, and that the world is actually “reglobalising” along different lines.
“In fact, strategic competition between nations can drive capital investment, and trade may continue to thrive in a multipolar system,” Mahtani said. “While the reconfiguration of global supply chains could raise costs and inflation due to increased focus on strategic resilience, the global economy’s adaptability should not be underestimated. The outcome of this geopolitical shift could still support robust trade and investment, despite the challenges presented by shifting global dynamics.”
Away from the big picture, US large-cap equities – the returns of which have “significantly exceeded” those on offer in most other markets – could face a more challenging year, with the dominance of the Magnificent Seven “naturally raising questions about the sustainability of such concentrated growth”.
“While US macro prospects look promising, much of the positive news may already be priced in, suggesting 2025 could be more challenging for large-cap US equities,” Mahtani said. “As global conditions improve, investors should consider trimming strategic allocations to large-cap growth stocks and the US market, which now scores poorly in long-term return estimates.”
Sectors like financials offer momentum and reasonable valuations, while value and small-cap stocks provide diversification and exposure to broader earnings growth. The macro backdrop for emerging market equities is more mixed, but they present an abundance of bottom-up opportunities, according to Philip Saunders, director of the Ninety One Investment Institute.
“India and the Middle East are richly valued but show transformative growth, particularly in workforce participation in Saudi Arabia and economic inclusion in India,” Saunders said. “Despite challenges in markets like Brazil and Mexico, which face regulatory and economic hurdles, there are abundant bottom-up opportunities in EMs. In South Africa, lower inflation and interest rates provide a positive outlook for banks, insurers, and retail, with the potential for GDP growth to surpass 2 per cent in the medium term, benefiting South African equities.”
