Many phenomena, including test scores, height, and long-term daily temperatures follow what statisticians call a normal distribution. Plotted on a graph, the values resemble a bell-shaped curve where most data points cluster around the average (mean) and the probabilities of extreme outliers become very insignificant as one moves further from the mean.
But, in a fat-tailed distribution, you will see a higher probability of extreme values compared to the bell curve. Real-life examples of fat tails include stock market crashes, natural disasters, and catastrophic insurance losses. Over the longer term, equities tend to show a positive fat tail with performance higher than the bell curve might predict.
With the return of Donald Trump to the White House, UK economic research firm MRB Partners cautions that investors should prepare themselves for two fat tails in asset performance over the months to come. The potential volatility of the next US presidency vastly increases the risks and rewards investors face, which could mean steep losses or outsized gains.
By now, the world is familiar with Trump. We know that he favours deregulation, loose fiscal policy, and lower corporate taxes. These are the factors that may lead to a positive fat tail over Trump’s term, with markets invigorated by robust consumer spending, healthy corporate earnings, and lower energy prices. Health, financial services, and energy companies would be expected to show especially strong performance with Trump unleashing the full entrepreneurial energy of the corporate sector. This view helped to power the initial gains in US equities as the results of the election became apparent.
But there are also significant negative fat tail risks raised by Trump’s second presidential term. He has threatened to impose blanket tariffs of 20% on all US trading partners and punitive tariffs as high as 60% on Chinese imports. These tariffs would reduce growth in the short term and stoke inflation.
Trump’s commitment to round up and deport millions of undocumented illegal immigrants, meanwhile, would also heat up inflation. The plan is likely to be expensive and logistically difficult and will lead to increased wages. The net result of the combination of tariffs and a reduced labour pool could be higher inflation that prevents the Fed from being able to cut interest rates as quickly as predicted.
Another fat-tail risk lies in the geopolitical arena. With continued volatility in the Middle East and tensions between Russia and the West running hot over Ukraine, Trump enters the global stage at a delicate time. Depending on how he handles Iran, Israel, and Russia/Ukraine, his actions could further inflame global instability or embolden bad actors. Alternatively, he might bring fresh impetus to peace efforts.
Given the excellent run US equities have enjoyed for the past year, many of the positive fat-tail returns could already be priced in, while just how bad the negative fat tail risk could be is hard to predict. With the Republican’s clean sweep of the Presidency, House, and Senate, Trump has the scope to enact his most radical economic promises, even if they tank markets.
It remains to be seen whether he would have the stomach to implement and maintain tariffs that immediately make an iPhone $240 more expensive or add $1 to the price of a coffee at Starbucks. In his previous term, Trump stopped escalating tariffs once equity markets started to drop. Only time will tell if he does the same this time around, but what we do know is that Trump, like fat-tailed distributions, is that he brings increased volatility and increased uncertainty.
“The definition of fat tail is the smallest number of observations in a given data set will represent the bulk of statistical properties.”
– Nassim Nicholas Taleb, essayist and mathematical statistician
“We simply do not know how [Trump] will behave in the face of sustained market hostility. It might scare him into economic conventionality.”
– Robert Armstrong of the Financial Times
Global News
- Tariffs, deficits and stretched valuations are giving Wall Street pause, as Trump fills out his cabinet and analysts grasp for policy details. Columnist Greg Ip of the WSJ writes that the president-elect’s growth and trade agendas are at odds – and that his economic team will point to the winner.
- Some key market metrics are starting to suggest the Trump-inspired rally in the dollar may have plateaued, as bullishness fuelled by the US election wanes. Bloomberg’s gauge of the currency stabilised on Wednesday after three days of declines. It’s holding just below the two-year high it touched last week.
- Climate action and climate finance were key focal points at this week’s Group of Twenty (G20) Leaders’ Summit in Brazil, where Brazilian President Luiz Inácio Lula da Silva urged developed nations to accelerate their timelines for achieving net zero emissions, aiming for targets 5-10 years earlier. While he acknowledged the importance of tackling climate change and committed to collaborative efforts, some experts argue the summit fell short of delivering a strong stance and concrete plans for phasing out fossil fuels.
- Brent crude gained 5.5% this week as geopolitical concerns over escalating tensions between Russia and Ukraine countered the impact of a bigger-than-expected increase in US crude inventories. “For oil, the risk is if Ukraine targets Russian energy infrastructure, while the other risk is uncertainty over how Russia responds to these attacks,” said ING analysts in a note. The Brent price is still 12% lower than the level of 6 October 2023 – just before the attacks in Israel led to the escalations in the Middle East.
- Gold will rally to a record next year on central bank buying and US interest rate cuts, according to Goldman Sachs Group, which listed the metal among top commodity trades for 2025 and said prices could extend gains during Trump’s presidency. “Go for gold” analysts including Daan Struyven reiterated a target of $3,000 an ounce by December 2025. The structural driver of the forecast is higher demand from central banks, while a cyclical lift would come from flows to exchange-traded funds as the Federal Reserve cuts, they said.
- Bitcoin rose to a record high above $94,000 as a report that Trump’s social media company was in talks to buy crypto trading firm Bakkt added to hopes of a cryptocurrency-friendly regime under the incoming American administration. It continued its streak yesterday, rising as much as 4.1% to a record $98,342. The crypto market has gained approximately $900 billion since Trump’s election win.
- The US government’s Justice Department formally proposed a partial breakup of Google on Wednesday, urging a federal judge to force a sale of the company’s Chrome web browser after a landmark ruling this year finding that Google had violated US antitrust law with its search business. This move could fundamentally alter the $2 trillion company’s business and reshape competition on the internet. Chrome could be worth as much as $20 billion. Google has promised to appeal. Government also wants Google to either sell Android, its smartphone operating system, or bar the company from making its services mandatory on Android phones.
- Nvidia’s earnings exceeded expectations but signalled a slowdown in its hypergrowth, following an 850% share-price surge over two years. The revenue forecast beat estimates by $400 million but fell short of the dramatic $1 billion beats seen previously, as Wall Street’s expectations have adjusted. While demand for Nvidia’s new Blackwell chips remains strong, investors are recognising that such extraordinary growth is unsustainable. Analysts view this as a healthy reset, acknowledging that while AI continues to drive demand, the explosive gains of recent quarters are unlikely to persist. Shares in Nvidia had gained 3.3% for the week as at Thursday’s close.
- Elon Musk is the world’s richest person partly due to his companies’ impressive innovations. But his wealth is also due to government contracts and programs that affected his two main businesses – electric vehicles and space travel. His companies have received tens of billions from government contracts and programmes. Since Trump’s election, Musk’s net worth has increased 25% to an estimated $326 billion, according to Bloomberg.
- Ford plans to cut almost 4,000 jobs in Europe over the next three years, about 14% of its workforce in the region, as it faces slowing demand for electric vehicles and rising competition from China. The cuts will be completed by the end of 2027, pending consultations with labour unions, and will be concentrated in Germany and the United Kingdom. “The global auto industry continues to be in a period of disruption, especially in Europe, where the industry faces unprecedented competitive, regulatory, and economic headwinds,” Ford said in a statement on Wednesday.
- Walmart’s business is surging as customers making more than $100,000 a year are fuelling the growth. Walmart’s US sales at stores open for at least a year grew 5.3% last quarter compared with the year prior, the company said on Tuesday, and its profit grew 8.2% last quarter. Walmart raised its financial outlook, a signal it expects a strong holiday shopping season. The company said it is gaining market share.
- As at Thursday’s close the S&P 500 was 1.3% up for the week.
Local News
- South Africa will use its presidency of the G20 to build on an earlier formal agreement by the world’s largest economies to strengthen multilateralism and reform global institutions including the UN, the World Trade Organization, and multilateral lenders, says President Cyril Ramaphosa. He called for the modernisation of the UN to enhance its effectiveness and agility. The president also emphasised the need for a fair global financial system, with more ambitious targets for grants and concessional financing. This is the first time Africa has hosted the group led by the heads of state and governments of countries that represent 85% of global GDP, 75% of global trade, and two-thirds of the world’s population.
- S&P Global has revised South Africa’s outlook to positive from stable and affirmed the sovereign long-term foreign and local currency debt ratings at ‘BB-’ and ‘BB’, respectively just six months after the formation of the Government of National Unity (GNU). National Treasury welcomed the news of the improved outlook over the weekend. “The positive outlook reflects the agency’s view that increased political stability following the May 2024 general elections and impetus for reform could boost private investment and GDP growth.
- Economic analysts are calling for an end to import tariffs as well as a more competitive environment to free up industry so it can contribute more to economic growth under the GNU. This comes as South Africa, in June, notified the World Trade Organization of its intention to impose a 9% duty on hot-rolled steel products to protect the local industry from a surge in imports. Donald MacKay, founder and CEO of XA Global Trade Advisors, said the current industrial policy was outdated and negatively affecting economic activity.
- The water crunch facing Gauteng and the proliferation of construction mafia activities, which have stopped projects worth R63 billion over the past five years, are weighing on business sentiment. The fourth quarter RMB/BER business confidence index, published on Wednesday, shows that, while overall business sentiment is on an upward trajectory, companies are still concerned about logistical bottlenecks and water challenges facing Gauteng.
- US ambassador to South Africa Reuben Brigety, who accused Pretoria of supplying arms to Russia to aid in its war effort in Ukraine, has resigned. His resignation will come into effect in January 2025, coinciding with the inauguration of Trump and “in accordance with standard procedure during a change of presidential administration,” he said. Brigety’s resignation also comes at a time when South Africa seeks to renew its diplomatic and trade relations.
- The South African Revenue Service has announced that withdrawals from the Two-Pot retirement system have increased to more than R35 billion from more than 1.9 million applications.
- Analytics Consulting says the dollar’s latest bout of strength has moved the estimate of fair value for the dollar to rand exchange rate up to R18.68 with the current spot level at R18.12. The current level of strength in the exchange rate continues to be impacted by a positive country-specific component. This characteristic was last seen in the exchange rate in 2018 during the period that was called “Ramaphoria”. The US dollar spot index has held on to its significant gains since the Republican sweep of the US Presidential and Congressional elections two weeks ago. The US dollar has now strengthened by 6.3% since its interim low on 27 September and by 3.2% since the day of the US elections. For an in-depth analysis click here.
- The South African Reserve Bank (SARB) yesterday cut interest rates 25bps for a second successive meeting and said its modelling showed further cuts were in the offing, but that the outlook remains highly uncertain. That was in line with expectations of all 20 economists in a Bloomberg survey. Central Bank governor Lesetja Kganyago said SARB would be cautious going ahead, given that it sees inflation averaging 4.5% this year, 4% in 2025, and 4.6% in 2026.
- Data from Statistics South Africa showed that the annual consumer price index (CPI) cooled for a fifth consecutive month and declined sharply from 3.8% year-on-year in September to 2.8% in October, largely driven lower by declining fuel and food prices. This inflation print is the lowest since June 2020 during the COVID-19 pandemic when the rate was 2.2% and was deeper than expectations that it could be between 2.9 and 3%.
- The statistics agency also reported that retail trade sales increased 0.9% year-on-year in September, showing growth despite persisting economic challenges. It said the increase was supported by general dealers’ sales, which increased 4.5% and contributed 2.1 percentage points to the overall growth. “The largest negative contributor was retailers in textiles, clothing, footwear, and leather goods (minus 5.5% and contributing minus 0.9 of a percentage point),” it said.
- State-owned airline SAA broke a more than decade-long money-losing streak in the 2023 fiscal year when it swung into a profit. It reported a net profit of R252 million in the year to end of March 2023, from a loss of R3.65 billion a year earlier, marking the first time it logged a positive bottom line since 2012. This came on the back of a nearly three-fold jump in revenue to R5.7 billion.
- Sanlam Group has appointed Ninety One as its primary active investment manager for single-managed assets, a move that will involve the transfer of some R400 billion in assets to the global asset manager. Ninety One intends to issue shares to Sanlam, giving Sanlam about 12.3% of Ninety One’s share capital. The deal could fuel an M&A wave. We do not see there being any impact to our clients as there will be no changes to the Ninety One Investment Platform that we utilise and no changes to any of the Ninety One funds.
- Shares in Naspers and Prosus jumped in early trade on Monday after Naspers advised it would report sharply higher interim earnings. Naspers said in a trading statement that headline earnings per share continuing operations for the first half of 2025 are expected to increase 103.2%-109.6%. The increase was driven by accelerated growth and improved profitability of its consolidated e-commerce businesses and equity-accounted investments, particularly Tencent. Despite this, shares in Naspers were trading 1.2% down for the week at the time of writing, while Prosus shares had fallen 1.5%.
- WeBuyCars sold more than 40,000 cars in a space of three months to September, cementing its place as the dominant force in the used-car market as cash-strapped consumers buy down. On Monday, the group reported a 16.5% increase in revenue to R23.3 billion in the year to end September, with the last three months of the period seeing the group sell more than 14,000 cars a month. The group, whose share price has doubled since being unbundled from Transaction Capital earlier this year, said its best-performing brands were Toyota, Ford, and Volkswagen.
- As at the time of writing, the rand was 0.7% stronger against the dollar and the ALSI was 2.2% up for the week.
Sources: Dynasty, Business Report, BusinessLIVE, Bloomberg, CNN, Reuters, New York Times, Daily Maverick, IOL, etc.
