In 2025, global markets rallied and many recorded historic highs. Portfolio manager Jithen Pillay discusses the Allan Gray Equity Fund's recent performance and explains why the portfolio remains defensively positioned for the year ahead.
2025 was a year for the history books. Heightened geopolitical tensions created, and then seemingly resolved, trade wars, and artificial intelligence (AI)-induced optimism dominated global markets. In South Africa, the near collapse of the government of national unity early in the year and a strained relationship with the United States were overshadowed by the strong tailwind provided by rising precious metal prices that lifted the FTSE/JSE All Share Index (ALSI). A cursory glance at 2025’s returns hides the sharp volatility that persisted during the year.
AI optimism and technology stocks continue to shape global markets
Globally, the MSCI World Index delivered a third consecutive year of strong double-digit returns, rising 21% in 2025 to close the year at a near all-time high. This performance was supported by the US, which comprises 72% of the index. As has been the case over the last three years, the breadth of this performance was narrow. Just seven stocks, the aptly named “magnificent seven”, accounted for 46% of the S&P 500’s performance in 2025 – largely fuelled by the promise of their AI advancements fundamentally changing the world and strengthening their business prospects. Futurist Roy Amara sums up the current investor psyche towards AI well: In the short term, people often overestimate the impact of a new technology while underestimating the long-term impact.
In the fullness of time, AI will almost certainly alter the way we interact and work. However, in the shorter term, it remains uncertain which AI hyperscaler will emerge as the winner and how these companies will appropriately monetise and fund their ambitions. What is more visible is that the five largest public AI hyperscalers plan to collectively spend more than US$1.5tn over the next three years. To put this into context, South Africa’s annual GDP stands at around US$450bn. We have two primary concerns here. Firstly, this capital expenditure will pose a material headwind to the earnings of these companies in the coming years, which we think is underappreciated. Secondly, the S&P 500 trades on a high multiple of these elevated earnings expectations and is fast approaching levels last seen during the 2000s technology bubble.
History shows that the first movers in world-altering technologies are rarely the eventual winners. Despite not owning any of the magnificent seven, aside from Alphabet, the offshore component of the Allan Gray Equity Fund performed well by owning more reasonably priced stocks that are beneficiaries of the AI capital expenditure described above, as well as holding positions in underappreciated sectors such as defence and biotechnology.
Precious metals drive local returns
Locally, the ALSI delivered a 42% return in 2025 – its best calendar year in two decades, with the index near an all-time high. Similar to the US, performance was narrow. Precious metal miners rallied sharply, more than doubling and contributing 58% of the ALSI’s return for the year. The domestic component of the Fund delivered strong absolute returns but lagged relative to the ALSI due to an underweight position in the precious metal sub-sector. Collectively, gold and platinum group metal miners now represent over 25% of the ALSI. While we have a constructive view on the gold price over the longer term, in the short term, the price will likely be volatile amid shifting geopolitical and macroeconomic conditions. South African gold miners also have a poor long-term track record. Historically, gold price windfalls have often been eroded by poor cost discipline and value-destructive expansion. As such, we have been selective about the precious metal miners included in the Fund, favouring companies more likely to return free cash flow to shareholders.
We remain defensively positioned
Borrowing from Sir John Templeton, “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” Given current valuations, we are concerned about the prospects for absolute returns both globally and locally. Therefore, the Fund is positioned defensively to protect capital. Within the offshore component, the Fund is tilted away from the US in favour of cheaper geographies. Where US exposure exists, it is in the less-crowded names. In South Africa, a slow reform agenda, anaemic capital investment and infrastructure concerns underpin our view that meaningful economic growth will remain elusive. Accordingly, the Fund’s local positioning is skewed towards defensive rand hedges – British American Tobacco and AB InBev are good examples. Where the Fund holds South African-exposed stocks, they are businesses that we believe can sustain earnings growth even in a weaker-than-expected economic environment.