As we noted in our January opinion piece titled the year of the voter, 2024 was being billed as the biggest election year in history with dozens of countries representing around 4 billion people expected to hold general or presidential elections. However, no other election will be as consequential for investors and the world economy as the US presidential race between Kamala Harris and Donald Trump. Gamblers, traders and investors are placing their bets ahead of the final vote on Tuesday next week.
Over the past month or so, many funds and traders have placed speculative ‘Trump trades’. Some are betting that a Trump win could be good news for US dollar strength, the gold price, cryptocurrencies, stocks in some regulated sectors, and Trump’s own social platform, Truth Social, stylised as TRUTH Social and owned by Trump Media & Technology Group. But less so for bonds and inflation.
Meanwhile, bookmakers and predictive markets indicate that punters are expecting Trump to win. Depending on the specific online site, the odds indicate that Trump has a markedly better chance of winning than Harris – an average probability of around 64% versus 35%. So-called predictive markets like Polymarket give a Trump win an even higher chance at 66%.
Elon Musk, the founder of Tesla and SpaceX, who has thrown his weight behind Trump, has argued that betting markets are likely to be more accurate than pollsters because people are betting their own money. However, history would suggest that the predictive power of polls and bookies is roughly the same.
When there’s an upset, pollsters and betting markets often miss in tandem. For example, 2016 was an especially bad year for both. Bookies’ odds and polls suggested that Hilary Clinton would easily beat Trump, while Britain would vote to remain in the EU in the Brexit election.
According to Bookmakers Review, betting odds have accurately predicted 77% of the expected candidates winning elections over the last 35 years. Polls have called the results correctly roughly as often. But a more interesting question that arises is whether betting markets can actually help to shape the final outcome.
As Bloomberg points out in a recent article, this is due to a phenomenon that hedge fund manager George Soros calls “reflexivity”. Rather than reflecting something that was going to happen regardless, predictive markets could turn the high odds in favour of an outcome into a self-fulfilling prophecy.
One mechanism by which this could work is by discouraging people from voting because they believe that their preferred candidate has no chance of winning. This may also raise the question of whether these markets can be manipulated to help achieve a particular outcome.
On Polymarket, where US residents may not bet, for example, Trump’s odds have been driven up by massive bets by a handful of whales. Rather than representing the wisdom of the crowds, markets with no limits on the size on individual bets may indicate the hopes and preferences of wealthy individuals.
More mundanely, the US election will be closely contested. Polls and betting markets have less predictive power when the margins between winning and losing are narrow. As in some of the more recent presidential elections (George W Bush in 2000 and Trump in 2016), there is a good chance that the winner will secure the electoral college vote but not the popular vote.
Polls suggest that the winner will be determined in seven swing states, where neither has a lead in the polls of more than one or two percent and where the difference between winning and losing could be a few thousand votes. Polls put Trump and Harris in a near dead heat. With the margin of error for most polling at 2-3%, either could conceivably win.
Markets could be choppy following the announcement of the results of the presidential race. It is possible that the results will only be finalised after weeks of recounts and legal challenges. What’s more, the composition of the House and the Senate will either enable or constrain the winning president’s policy choices.
We take a long-term view of the markets and do not bet on any particular outcome. In our view, macroeconomics and the fundamentals of companies will outweigh politics in the longer term. Rather than speculating on the outcome, we have always focused on positioning our investors’ portfolios to withstand a wide range of economic and political scenarios.
“I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events.”
– George Soros, Hedge Fund Manager and Philanthropist
“Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. One provides a static picture, the other a dynamic one.
– George Soros, Hedge Fund Manager and Philanthropist
“A self-fulfilling prophecy is an assumption or prediction that, purely as a result of having been made, causes the expected or predicted event to occur and thus confirms its own ‘accuracy.’”
– Austrian psychologist, Paul Watzlawickst
“I shall always consider the best guesser the best prophet.”
– Marcus Tullius Cicero, Roman statesman, lawyer, scholar, philosopher, writer
Global News
- US Vice President Kamala Harris is maintaining a narrow advantage in two of the three “blue wall” states (Michigan at 48% versus 43% to Donald Trump, while 51% of Wisconsin voters support her against 45% for Trump). This collectively represents her clearest path to an Electoral College victory over Trump, according to CNN polls released on Wednesday.
- The scenario of another contested presidential race split by violence could be ahead as an unpriced risk for investors who have long counted on US institutional integrity as a foundation for America’s economic strength. As it is home to the world’s dominant currency, it has been able to hold down US borrowing costs and the prices of commodities from oil to iron as well as cut its political foes out of the global financial system. Underpinning the dollar’s dominance, according to Fed chairman Jerome Powell, Treasury Secretary Janet Yellen and their predecessors: The rule of law and institutions transcend individual politicians.
- After a spike over the past five weeks, Trump’s social media stock is suffering a sudden setback. Shares of Trump Media & Technology Group, the owner of Truth Social, plummeted by 22.3% on Wednesday – its largest single-day drop since its March debut. This fall followed an 8.8% gain on Tuesday, which had capped the stock’s five-week surge at 324%. As a result, Trump’s stake in the company fell from $5.9 billion on Tuesday to $4.6 billion on Wednesday, erasing $1.3 billion from his net worth in a single day. The stock may rebound if Trump secures an election win but would likely crash in the event of a Trump defeat.
- The Fed’s preferred measure of underlying US inflation, the personal consumption expenditure price index posted its biggest monthly gain since April, increasing 0.3% in September, and 2.7% from a year earlier, according to Bureau of Economic Analysis data released yesterday. Overall inflation was 2.1%, the lowest since early 2021 and just above the central bank’s 2% goal. The increase in the cost-of-living rate could see the central bank slowing its rate cuts.
- The US Secretary of State, Antony Blinken, said negotiators have made “good progress” toward a deal that would bring a ceasefire between Israel and Hezbollah in Lebanon. Early talk of cease-fires had helped to push down oil prices. Brent crude sank more than 6% on Monday and Tuesday, before staging a partial recovery on Wednesday. However, brent crude rose by 2% this morning to trade at $74 per barrel on reports that Iran could be planning to attack Israel from Iraqi territory.
- Gold recently reached a record high of $2,790.10 per ounce but retreated by nearly 2% to $2,731.65 on Thursday as investors took profits. The metal’s strong performance this year—rising over 30% – has been fuelled by central bank buying and heightened demand as a safe haven amid conflicts in the Middle East and Ukraine. However, recent US economic data, including a slight drop in inflation and strong consumer spending, has led to expectations of a slower pace for interest-rate cuts, which could impact gold’s appeal. The tight US presidential race also adds uncertainty, with analysts cautioning that a correction in gold prices may be on the horizon.
- The UK is raising taxes as the government seeks to shore up finances by targeting higher earners, wealthy foreigners and businesses. Chancellor of the Exchequer, Rachel Reeves, the first woman to ever hold the position, unveiled the tax hikes Wednesday in the ruling Labour Party’s first budget since it won a landslide victory in a general election in July. Tax will account for a record 38% of gross domestic product, adding £41.5 billion to the fiscus by the end of the decade. Yesterday, UK bonds tumbled, extending a selloff triggered this week by the Labour government’s plans for borrowing and fiscal stimulus over the coming years.
- Europe struggled to turn around its economic fortunes in the northern hemisphere’s autumn, as Germany, the region’s powerhouse, reported weak growth, offsetting stronger expansion in the continent’s southern countries, the European statistical agency reported on Wednesday. Economic output in the 20 countries that use the euro grew 0.4% from July to September versus the previous quarter. Compared with a year earlier, the eurozone grew 0.9%.
- Japan faces a period of political instability after the ruling coalition failed to win a majority in parliament for the first time since 2009, setting up a race among two main blocs to form a government. A tally by public broadcaster NHK showed the Liberal Democratic Party and Komeito have a combined 215 seats, short of the 233 needed for a majority in the lower house. The main opposition Constitutional Democratic Party of Japan has secured 148 seats. More than half a dozen other parties are splitting the other 250 seats.
- China’s economy is showing signs of stabilising after Beijing unveiled the boldest stimulus measures since the pandemic. Factory activity unexpectedly expanded in October after five months of contraction, the National Bureau of Statistics said yesterday. The official manufacturing purchasing managers’ index rose to 50.1, higher than a forecast of 49.9 by economists. The non-manufacturing PMI showed activity in construction and services expanded after staying little changed the previous month.
- Zimbabwe’s ruling party passed a resolution to adopt the bullion-backed ZiG currency as the country’s sole legal tender and phase out the use of US dollars. No timeline has been given for the change as the country seeks to “de-dollarise”.
- Amazon.com’s results released last night showed that its efforts to cut and reallocate costs and put the cloud computing and e-commerce giant on sounder footing were paying off. The Amazon Web Services cloud division, which suffered record low sales growth last year, continued to regain momentum during the third quarter. The online retail operation grew unit sales by double digits. So did revenue at Amazon’s fast-growing advertising business. Total third-quarter revenue increased 11% to $158.9 billion, exceeding estimates. Amazon shares rose about 5% in extended trading. The stock has increased 23% this year. (Amazon is the fourth-largest holding in the iShares World Equity Index Fund, one of Dynasty’s preferred index-tracking components in our house-view funds.)
- Apple, heading into its most critical sales period of the year, sparked fresh concerns about revenue growth and lingering weakness in an intensely competitive China market. Following the company’s fourth quarter earnings report, Apple said that total sales in the December period will rise by a percentage in the low-to-middle single digits. Analysts had been projecting a 7% increase. The concerns weighed on shares in late trading, sending them down about 2%. The stock had been up 17% year-to-date. (Dynasty investors have exposure to Apple with it being the second-largest holding in the MSCI World Quality Index, as well as the second-largest holding in the iShares Edge MSCI World Quality Factor UCITS ETF. The world’s largest company by market capitalisation is also the iShares World Equity Index Fund’s top holding.)
- Google parent Alphabet’s expensive foray into AI is starting to pay off as it delivers better-than-expected sales for its cloud-computing business and more use of its flagship search engine. Revenue, excluding partner payouts, jumped 16% to $74.6 billion from a year ago, the company said in a statement on Tuesday, surpassing analysts’ estimates. Third-quarter net income of $2.12 per share also far exceeded projections. (Alphabet is a top ten holding in both the MSCI World Quality Index as well as the iShares World Equity Index Fund).
- Microsoft shares dropped about 4% in late trading after it forecast slower quarterly cloud revenue growth on Wednesday, reflecting the company’s struggle to bring data centres online fast enough to keep up with demand for artificial intelligence services. Sales from the Azure cloud-computing business will rise 31% to 32% in the current period. (Microsoft is a top ten holding across most of our offshore funds).
- Meta Platforms CEO Mark Zuckerberg warned investors on Wednesday that Meta will continue to spend significantly on infrastructure and other projects like the metaverse and AI-powered glasses, efforts he believes are core to the company’s future. Shares fell more than 2.8% in extended trading. (Meta is a top ten holding of our preferred actively managed funds, namely Fundsmith and GQG).
- Chinese electric vehicle maker BYD’s revenue has outpaced that of Tesla for the first time. It posted an 11.5% rise in third-quarter net profit on Wednesday as it maintained strong sales momentum helped by government trade-in incentives. With third-quarter revenue up 24% on year to $28.24 billion, BYD’s quarterly revenue for the first time outpaced Tesla, whose revenue for the July-September quarter reached $25.2 billion.
- Volkswagen cited its least-profitable quarter in years as cause for the first factory closures in Germany in its 87-year history, setting the stage for contentious negotiations with labour leaders. Operating profit plunged 42% to €2.86 billion in the third quarter, with revenue also slipping from a year ago, Volkswagen said on Wednesday. Its operating margin dwindled to just 3.6%, the lowest in over four years.
- Mastercard reported profit that beat analysts’ estimates, as it benefited from cross-border transactions and said its results reflected healthy consumer spending. Global purchase volume climbed 11% from a year earlier on a local-currency basis to $2.058 trillion, surpassing analyst forecasts of $2.054 trillion. Shares of the company were little changed at $509.48 at 10:19 a.m. in New York yesterday. They’ve gained 20% this year. (Mastercard is the sixth-largest holding in the iShares Edge MSCI World Quality Factor UCITS ETF, which forms a component of our house-view funds).
- As at Thursday’s close the S&P 500 was 1.8% down for the week.
Local News
- The first Medium-Term Budget Policy Statement (MTBPS) since the Government of National Unity) announced by the minister of finance, shows fiscal slippage in the current year. It makes most disappointing projections of economic growth over the next three years at 1.8% per annum and maintains an elevated ratio of debt to GDP. Finance Minister Enoch Godongwana emphasised efforts to curb the deficit by restraining spending and stabilizing tax collections, but public debt remains unsustainable as debt-service costs grow faster than the economy. Tax revenues are expected to fall short by R22.3 billion, largely due to reduced VAT and less income tax.
- The day after the MTBPS, Finance Minister Godongwana reiterated that South Africa’s main challenge in resolving its problems was weak economic growth, not the enormous government debt burden, which is forecast to breach R6 trillion in 2025/26. He has called on the private sector to aid the country’s growth.
- Key to the pro-growth agenda, said Godongwana, was a raft of reforms to the state’s approach to procuring and building public infrastructure that would “create conditions to attract greater private sector participation”. Among the reforms are projects in electricity transmission infrastructure, with water and transport to follow if these are successful. There will also be a new Water Partnerships Office to facilitate private participation, with two water projects already on the table.
- The MTBPS provides guidance to the medium-term development plan the Government of National Unity partners have agreed on, unveiling the starting steps to achieve a 3% growth rate, says agriculture minister and DA leader John Steenhuisen. Steenhuisen addressed investors virtually ahead of the speech at the 11th SA Tomorrow Investor conference being held in New York.
- Notwithstanding certain deteriorating metrics and the tepid GDP forecasts announced in the MTBPS, the rand was trading at R17.64/USD this morning, largely unchanged from its level pre the Statement. The Dynasty Investment Committee’s Currency Decoder calculated fair value at R18.28/$ on Monday, primarily attributed to the strengthening of the US dollar spot index by 4.1% since its interim low point on 27 September.
- Last week’s Financial Action Task Force’s global plenary led to some indicators of reprieve for South Africa. Of the 22 actions that the body determined the country should take to escape the grey list; we’ve now met the mark on 16 of them. However, the remaining six will be difficult to achieve, according to BusinessLIVE columnist Stuart Theobald. Three of them require that South Africa “demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and the full range of task force activities in line with its risk profile”.
- National Treasury plans to offer R11 billion in incentives to convince 30,000 civil servants to take early retirement over the next two years. Under the scheme, which will be detailed in the 2025 budget in February, public servants will not be penalised for bowing out from their positions before retirement age. Pensions are expected to be “topped-up” to encourage workers to take early retirement.
- National Treasury also announced that no funds have been allocated to struggling state-owned enterprises, such as Denel and the Post Office. Arms manufacturer Denel remains a financial risk as it is unable to meet its financial obligations.\
- Bidvest has warned that deteriorating basic infrastructure, characterised by a subpar rail system, poor port efficiencies, and declining water quality and availability, continues to redirect commodity flows to neighbouring countries. While the change in cargo flows benefited its freight division’s Naval and Manica Group Namibia, the company has called for urgent reform and intervention from both the private and public sectors to improve the ease of doing business and attract future investment.
- Investec’s ambitions in business banking appear to be expanding beyond initial expectations, with plans underway to introduce a new transactional banking service for large corporates – a sector it hasn’t traditionally focused on. Since launching a comprehensive business banking service in 2021 for mid-market and commercial clients with annual turnovers between R30 million and R1.5 billion, Investec is now setting its sights on larger corporations. Although it has long provided lending, advisory, and other services to big corporates, defined as those with turnovers of R1.5 billion or more, Investec aims to roll out this transactional banking service for them within the next 18 months. (Investec is the 6th largest 10 holding in the Coronation Top 20 Fund, included in our local house-view funds.)
- Shares in Shoprite surged more than 5% at one point on Tuesday after a first-quarter update showed strong sales growth in its core local supermarket division and aggressive store rollouts across its brands. Group sales rose 10.4%. Its South African supermarkets division was the top performer with 11.4% sales growth, which was slightly lower than the high base of 13.3% set in the first quarter of the previous year. It also reported strong volume growth.
- The wine industry is poised for a comeback, driven by rising local demand and the growing popularity of white wines like Cap Classique and Chenin Blanc in China. Exports of Cap Classique to China rose by 4% in 2023, despite a decline in overall wine exports. Even though South Africa’s wine exports to China shrank in 2023, that market remains a vital growth area for the local wine industry, with its market share steadily increasing since 2019.
- As at the time of writing, the rand was 0.1% stronger against the dollar, and the ALSI was 1.4% down for the week.
Sources: Dynasty, Business Report, BusinessLIVE, CNN, Daily Mail, Reuters, Bloomberg, News24etc.
