In this insightful interview, Rashaad Tayob, Portfolio Manager at Foord Asset Management, offers his outlook for 2025, highlighting key global economic trends and investment opportunities. He discusses the potential for inflation to return, driven by fiscal and monetary stimulus, supply chain disruptions, and labour market changes. Tayob also predicts that emerging markets, particularly China, could outperform in the coming years, thanks to attractive valuations and growth in sectors like green energy. He advises investors to be cautious of overvalued US equities and suggests looking at defensive sectors, like utilities, and higher-yielding assets in emerging markets. Tayob also touches on South Africa’s investment landscape, identifying opportunities in commodities linked to renewable energy. He encourages a diversified, balanced portfolio that emphasises sustainable, long-term growth and careful risk management.
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Highlights from the interview
In this interview, Rashaad Tayob, Portfolio Manager at Foord Asset Management, shares his outlook on the global economy and investment opportunities for 2025. He emphasises that while U.S. equities, particularly the “magnificent seven” tech stocks, have driven market performance in recent years, there are growing signs of market rotation away from these mega-cap stocks. Tayob cautions that the U.S. market is becoming increasingly top-heavy, and a slowdown in growth could lead to a re-rating of these stocks. He suggests that international markets, especially emerging markets, might offer more attractive opportunities moving forward, given their lower valuations and higher growth potential.
He also highlights China as an area of focus despite political and regulatory risks, pointing to sectors like electric vehicles and green technology as long-term growth drivers. On the topic of South Africa, Tayob acknowledges the country’s economic struggles but identifies potential opportunities, particularly in commodities linked to the green energy transition and in South Africa’s relatively high bond yields. He sees potential for political and economic reforms to improve investor confidence but remains cautious about the challenges ahead.
Tayob advises a diversified investment strategy that balances risk and opportunity with a keen eye on global and regional trends, particularly in emerging markets and sustainable sectors like renewable energy.
Edited transcript of the interview
Alec Hogg (00:09.013):
This interview is brought to you by Ford Asset Management.
Alec Hogg (00:19.841):
Rashad Tayob is with us in the studio. Rashad, it’s lovely to be talking with you today. You guys had a webinar a while back where you gathered some portfolio managers. I presume you charged everyone with the task of answering: what will happen in 2025? That’s a bit of a “hospital pass,” as we say in rugby parlance. But what was the purpose of this?
Rashaad Tayob (00:41.976):
So, we started last year by giving our clients an overview of our expectations for the year ahead and how we were positioning ourselves. We don’t want to make precise forecasts, but we want to understand the way the world is heading, in which direction things are going and the risks. Last year, we looked ahead to 2024 and made several predictions. The market expected these to be low-probability events, but we thought there was a higher chance than generally expected. To our credit, I think we did a pretty good job with those predictions — like the rise in the gold price and the recovery in South African equities.
So, when those predictions worked out well, we thought, why not do it again this year? We forced our portfolio managers to put their heads on the block. We asked them, “How can we thrive in 2025?” We tasked everyone with thinking about how they’re positioning their portfolios to thrive and ensure our clients will do well next year.
Alec Hogg (01:51.891):
Okay, well, congratulations on making those calls last year! But I’m sure you’re familiar with Nassim Taleb’s view on predictions and his concept of being “fooled by randomness.” One of the big things that stood out to me was that Taleb, and those unfamiliar with him, is a great author and former hedge fund manager revered in the investment industry; he called the global financial crisis when pretty much no one else did.
However, as a young portfolio manager, he spent a lot of time studying people’s predictions and discovered that most of them were wrong. You guys had a 100% record from last year by putting your predictions on the line, but I guess it’s always good to exercise one’s mind about what might be in store for us. Let’s start with your prediction because it’s quite controversial. You reckon inflation is going to make a comeback in a big way. Take us through your thinking on this.
Rashaad Tayob (02:56.408):
So, 2024 has been a year of disinflation. There’s a global rate-cutting cycle underway. The South African Reserve Bank (SARB) cut rates last week, and the Fed started cutting earlier in the year. Inflation has been moving back towards target, and we’re in a disinflationary environment. So why do I think inflation could come back in a big way in 2025?
The factors that drove the high inflation we saw in 2021 and 2022 — which spiked to multi-decade highs — will likely reappear in 2025. Let me explain what I mean. In 2025, we could see a resurgence of the same supply-side constraints that drove inflation in 2021 and 2022. For instance, we had shutdowns due to COVID, which created massive supply chain disruptions, and shipping costs spiked. We also had massive fiscal stimulus, where governments handed out checks, particularly in the developed world. In the U.S., personal income surged 30% year-on-year during a recession — an unprecedented phenomenon.
Then came the monetary stimulus, with the Fed’s balance sheet expanding by almost a trillion dollars a month. All three factors—fiscal stimulus, supply-side constraints, and monetary stimulus—could resurface as we head into 2025.
Let’s break it down:
- Monetary stimulus: We don’t have quantitative easing (QE), but we have synchronized rate cuts, a form of monetary easing.
- Fiscal stimulus: Governments have struggled to change their post-COVID spending habits. For example, the US’s fiscal deficit is still 7%, close to $2 trillion, even though unemployment is at near-record lows and reasonable growth.
- Supply-side constraints: We could see a potential trade war that constrains supply and a flattening or even reduction of immigration, which has helped moderate inflation by increasing labour supply. If immigration is cut back or reversed, particularly in the US, the labour market could tighten again, putting upward pressure on wages and, consequently, inflation.
When I consider these three factors, they have a strong chance of materializing in 2025, which is why I think inflation could surprise on the upside.
Alec Hogg (06:17.003):
So, Donald Trump comes with a lot of risks attached. On the other hand, you have Elon Musk, who’s pushing for government expenditure cuts. Do you think that’s more hype than reality?
Rashaad Tayob (06:35.448):
People like Elon Musk, Vivek Ramaswamy, and JD Vance are very intelligent, non-political individuals focused on reducing government intervention, regulation, and overall spending—something the US certainly needs, as government spending has gotten out of control and undermines the economy’s dynamism.
Suppose you look at South Africa over the last decade. In that case, one of the reasons we’ve stagnated and grown by less than 1% per year in per capita terms is that we’ve subscribed to the belief that the government should drive growth instead of recognizing that it’s the private sector that drives economic growth, and government should facilitate that.
The US has a shot at turning this around, but these are massive, complex systems. And as Nassim Taleb would argue, unpredictable things can happen when you poke at a complex system. Much of the government spending is non-discretionary. Around 70% of US government spending is on things like Social Security, Medicaid, and healthcare. While I think there are savings to be made — particularly in the healthcare sector, which is wasteful and overpriced — the challenge will be cutting discretionary spending, which is far more difficult.
While I support the initiative to reduce government spending, turning around something as large as the US government will be harder than people anticipate.
Alec Hogg (08:37.851):
No doubt, absolutely no doubt. But the hype is there now, and I suppose everyone’s excited about it. Your colleagues had some interesting thoughts as well. So, we’ve touched on the rising inflation. Before we move on, what are the implications if inflation roars back? Good for gold? Good for Bitcoin? Who else benefits?
Rashaad Tayob (09:03.276):
If inflation returns, one key risk is that we could see issues in the government bond market by 2025. US bond yields are already above 4%, and the cost of servicing debt has increased dramatically. The interest payments on US government debt have gone from $300 billion a year to over $1 trillion. In fact, interest payments now account for about 20% of total government revenue—a very costly burden.
It’s a similar story in South Africa, where about 20% of our revenue goes to service debt. The US has benefited from low interest rates over the last decade while building up debt, but now, in a high-interest-rate environment, the cost of servicing that debt is becoming a real problem. If inflation starts ticking up again, say to 4% or 5%, the bond market could lose confidence in the ability of the US government to repay its debt, especially if yields don’t increase enough to compensate for inflation.
This could trigger a bond market dislocation, similar to what we saw in the UK with Liz Truss’s budget, where the bond market lost faith, and the Bank of England had to intervene. If that happens, it would likely be a big positive for gold, Bitcoin, and other real assets. The moment the Fed is forced to backstop the bond market again will be a key turning point.
Alec Hogg (10:54.741):
We live in very interesting times. Defensives, not surprisingly, are a theme that will outperform in the U.S. Now, what do you mean by “defensives”?
Rashaad Tayob (11:08.12):
Brian Arceis, one of our portfolio managers in Singapore, has argued that utilities—specifically regulated utilities, like electricity—offer very good value at attractive valuations. As we electrify the economy, these companies have steady growth paths and significant spending requirements. In South Africa, for example, we need to invest heavily in the power grid. It’s a similar situation in the U.S. and around the world.
If you can find regulated utilities required to increase capacity and ensure a steady electricity supply, you’re investing in companies with monopoly power. You do not see 20-30% earnings growth, but you can expect reliable, high single-digit growth on a good multiple. He argues that these should be core parts of a defensive portfolio, especially when compared to stocks with very high valuations, like those trading on P/E ratios in the 20s or 30s.
Alec Hogg (11:54.825):
Alright, that’s a theme for 2025. But you’ve got some concerns about the US stock market. It sounds like you think things are slightly overvalued. What are your concerns?
Rashaad Tayob (12:10.437):
I think the US stock market is currently overvalued, especially if you look at the top end of the market. This year’s gains have come from mega-cap tech stocks like Apple, Amazon, and Microsoft. These companies are fantastic businesses, but their valuations are now extremely high. I’m particularly concerned about the tech sector. The so-called “magnificent seven” — Apple, Amazon, Microsoft, Google, Nvidia, Tesla, and Meta — have driven most of the gains in the US stock market, but they make up an outsized portion of the index. These stocks are now priced at valuations highly dependent on continued growth, which may become harder to sustain as the interest rate environment stays higher for longer.
If these stocks falter, the broader market could see a significant pullback, which is a concern.
Alec Hogg (12:55.812):
So, if you’re looking at some of the mega-cap stocks — and you mentioned the “magnificent seven” — are you worried that they’re too concentrated in the hands of a few players? What do you see as the next big thing? Do you think the market will start to rotate out of these high-flying tech stocks into something else?
Rashaad Tayob (13:12.627):
Absolutely. We are seeing some early signs of that rotation, which we’re watching very closely. The mega-cap tech stocks have dominated the market over the last few years, but they must continue growing at extraordinary rates at these valuations to justify their prices. If growth starts to slow down or the economy doesn’t deliver the expected growth, we could see a major re-rating of these stocks.
The US market is extremely top-heavy, with those seven companies accounting for a huge portion of the overall market capitalization. The market has very little breadth right now, which is a warning sign. Historically, healthy markets have a broader company base that contributes to overall market growth. If the leadership of these seven stocks falters, the whole market could struggle to keep up.
Now, where is the market likely to rotate to? One place we’re looking at is international markets, particularly emerging markets, which may start to offer more value as the U.S. market starts to look more expensive. We’re already seeing some signs of life in markets like China and parts of Asia, and these markets are more sensitive to growth cycles and might not be as dependent on interest rates and inflation as the US market is.
Alec Hogg (14:28.075):
So, you’re suggesting a shift towards global equities. Is that primarily based on valuation, or do you think geopolitical factors like trade or government policy will drive growth in these areas?
Rashaad Tayob (14:43.882):
It’s definitely a mix of valuation and underlying growth drivers. As I mentioned earlier, the U.S. market is starting to look fairly expensive, especially relative to emerging markets. Many of these emerging markets are trading at significantly lower price-to-earnings (P/E) ratios, offering higher growth potential.
Geopolitically, there’s also a big focus on the de-dollarization trend, with countries looking to reduce their reliance on the U.S. dollar in international trade. This is something that’s being driven by both political and economic factors. China, for example, is encouraging trade settlements in the yuan, and we’re seeing other countries in Latin America and Africa also diversifying away from the dollar. While this doesn’t necessarily mean the dollar will collapse, it could lead to a slower, more gradual decline in its dominance, impacting US markets and the global economy.
We must also consider the long-term implications of climate change and the transition to renewable energy. Countries and companies focused on green technologies and sustainability will likely benefit over the next decade. This trend is already playing out in places like Europe and parts of Asia, where there’s more aggressive policy support for decarbonisation. For example, South Korea has a massive green infrastructure plan, and India is building out solar capacity at an extraordinary rate. These are the kinds of growth drivers that could outperform the more developed, mature economies in the West, where growth is slower and more constrained.
Alec Hogg (16:12.500):
And you’re comfortable investing in China despite all the negative headlines? It seems like there’s a huge gap between what the Chinese government is doing and what international investors are doing, with many staying away.
Rashaad Tayob (16:27.625):
Yes, it’s a tricky situation, and I understand why investors are cautious. But China is still one of the largest and fastest-growing economies in the world, and we believe there are opportunities there, even though there are significant geopolitical risks.
The Chinese government has been tightening up regulation on tech and other sectors, and there’s an element of political risk, especially given the geopolitical tensions with the US and the West. However, we also know that China has a lot of room for growth in areas like technology, green energy, healthcare, and infrastructure. The government’s policies around these sectors will likely continue supporting these industries in the long term, even if it means short-term volatility.
As investors, we need to be selective. We’ve been looking at sectors within China that are less exposed to direct government interference and more aligned with the country’s long-term strategic goals. For instance, China’s push to become a leader in electric vehicles (EVs) and battery technology presents significant opportunities. We also like China’s focus on renewable energy and green tech, which could help propel the country’s growth despite its structural economic challenges.
That said, it’s not without risk, and we’ve been diversifying our China exposure to balance that risk with some of the opportunities in other emerging markets.
Alec Hogg (17:57.420):
All right. So, you’re looking at growth in some of these emerging markets but not abandoning the US market — it’s just about being more selective in your approach. Let’s quickly touch on South Africa. There’s a lot of local focus on how the country is faring amid the broader global trends. You mentioned earlier that South Africa is struggling with growth — is there a way to see South Africa outperforming in 2025?
Rashaad Tayob (18:25.517):
South Africa is interesting because despite all the challenges — from load shedding to high unemployment — there are some key areas where we believe the country could do well. The first is commodities. We remain bullish on certain sectors of the commodity market, particularly those linked to the green energy transition, like copper and lithium. South Africa is a major player in some of these critical resources, and demand for them will only grow as the world shifts toward cleaner energy.
Another factor is that we have a fairly high yield environment, with bond yields in South Africa remaining attractive, especially compared to other emerging markets. Investors are starting to recognize that South Africa’s bonds offer a relatively higher yield, which could make them an attractive option for those looking for income in a low-growth environment.
Lastly, there’s the potential for political reform. While we’re not holding our breath for a complete turnaround, there are signs that certain political factions are beginning to focus more on pro-business policies, particularly infrastructure development and energy reform. If the government can start addressing structural issues — like Eskom’s problems — we could see more investor confidence returning.
But, in general, I think we need to be cautious. South Africa is still facing a tough economic reality, and fixing things will take a lot of work. However, there’s always opportunity in underperforming markets, and if we get the right political and economic reforms in place, South Africa could outperform the broader emerging market group.
Alec Hogg (19:57.061):
On that cautious note, thank you so much for your time today, Rashad. Always a pleasure to chat. We’ll see what 2025 brings.
Rashaad Tayob (20:05.847):
Thank you, Alec. It’s been great speaking with you.
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