From the Government of National Unity’s failure to reach an agreement around its maiden Budget, to Trump’s market-moving “Liberation Day” tariffs and South Africa’s highly publicised diplomatic woes, South African investors have had to contend with heightened uncertainty over the last few months. Local and global markets are shifting at a rapid pace, highlighting the importance of a disciplined investment approach and taking a longer-term view. Twanji Kalula summarises some of the key points covered at our May/June “The Times with Allan Gray” events, as presented by portfolio manager Rory Kutisker-Jacobson.
Elevated market volatility often distracts investors from the underlying fundamentals that drive the long-term value of their investments. Rather than spending the bulk of our research efforts dissecting the market’s response to the daily flow of news headlines, we focus on understanding the enduring trends that shape the prospects for individual companies, sectors, and the broader economic environment. This extensive research is a key input as we analyse the fundamentals of each asset we consider for our clients’ portfolios.
Global consumption trends really matter
Approximately one-third of all goods produced in the world are manufactured in China – yet China’s approximately 1.4 billion people consume just 12% of the goods and services produced globally. In contrast, the United States consumes approximately 29% of global goods and services, while contributing less than 15% to global manufacturing. This imbalance is one of the main drivers behind the drastic reciprocal tariffs announced by US President Trump, which aim to encourage domestic production and reduce reliance on Chinese imports.
These developments have drawn greater attention to global consumption patterns, which are shaped by long-term shifts in supply, pricing and consumer behaviour. For valuation-oriented investors, the consumer staples sector – which includes food, beverages and household products – offers fertile ground for identifying undervalued businesses. Demand in this sector tends to evolve gradually, making the sector’s prospects more sensitive to longer-term structural trends than to short-term market noise.
In addition, the MSCI World Consumer Staples Index has underperformed the broader MSCI World Index over the last decade. As valuation-oriented investors, this divergence heightens the potential to uncover mispriced opportunities in the sector, provided we understand the long-term forces at play and how they may impact our assessment of a company’s intrinsic value.
Wellness trends are changing global consumption habits
One trend we have been monitoring is the rising popularity of the new generation of obesity medications, such as Ozempic, Mounjaro and Wegovy. While medical researchers are still working to gain a full understanding of the underlying mechanisms and longer-term effects of these GLP-1 medications, millions of consumers are using them successfully to manage weight and treat chronic health conditions. Although still relatively in their infancy, these drugs are in high demand and are influencing consumption patterns – particularly in the food and alcohol sectors.
The proliferation of these obesity drugs has been felt by the alcohol industry, as the medications have been shown to reduce the desire to consume alcohol. This may seem like a significant headwind for brewing companies, like Anheuser-Busch InBev (AB InBev), however, the investment case is more nuanced. While spirits had been gaining market share at the expense of beer for some time, this trend has reversed in recent years, as these medications gained momentum. By some estimates, 80% of the users of the medications are women. As more women shy away from drinking cocktails due to their use of these medications, they are consuming less spirits. In contrast, women account for just 20% of regular beer consumers, and beer consumption has been less affected by the introduction of the drugs. In fact, the beer category has started regaining its “share of throat”, rising from 46% in 2018 to 50% of total alcohol volume in 2024.
Gen Z’s entry into adulthood has also reshaped alcohol consumption patterns. Relative to the generations before them, this cohort appears to have embraced healthier lifestyle choices and is drinking less alcohol than previous generations. Many Gen Zs came of legal drinking age during the height of the pandemic, which may have served to minimise the role alcohol plays in their lives. While this has had a negative impact on traditional beer consumption, it has led to the rising popularity of low- and non-alcohol alternatives, such as zero-alcohol beer and seltzers. AB InBev’s “beyond beer” segment has seen significant growth, with revenue from its no-alcohol products up 23% from 2023 to 2024, and Corona Cero sales surging by a remarkable 125% over the same period.
Reduced-harm nicotine products are growing rapidly
Changing habits among younger consumers are also evident in the tobacco industry. Gen Z is shying away from traditional cigarettes and embracing alternative forms of nicotine consumption like vapourised products (vapes and e-cigarettes), heat-not-burn tobacco products and modern oral products (nicotine pouches and dissolvables). While these new generation products aren’t harmless, they have proven to be significantly less harmful than conventional tobacco products.
As traditional tobacco sales decline, British American Tobacco (BAT) is seeing rapid growth in its vapour and modern oral segments. Velo, BAT’s most popular nicotine pouch brand, is growing in popularity around the world. Though Velo lags competitor Philip Morris’s more entrenched Zyn product in some markets (particularly the US), BAT grew its modern oral revenue by approximately 39% in 2023 and a further 51% in 2024, excluding the impact of foreign exchange.
Technology, trust and the rise of direct-to-consumer brands
The rise of the smartphone has transformed consumer behaviour and fuelled the impact of social media. This has paved the way for entrepreneurial influencers to create and market products directly to consumers in categories that have traditionally had high barriers to entry.
One fascinating example is Jimmy Donaldson – better known as MrBeast – a 27-year-old from Wichita, Kansas who is the world’s most popular YouTube creator with an audience of over 620 million subscribers across his channels. Frustrated by highly processed, additive-laden snacks, MrBeast decided to create a selection of high-quality snacks under the brand “Feastables” in 2022. Promising his followers products made from ethically sourced ingredients, MrBeast has managed to convert his online subscribers into loyal consumers of his multimillion-dollar, direct-to-consumer food brand, without needing to invest heavily in manufacturing operations or distribution networks, thanks to outsourced production facilities and online sales platforms.
As a result, MrBeast has built a confectionery empire in less than four years, generating more than US$250 million in revenue in 2024 alone. Remarkably, Feastables is likely to eclipse the revenue generated by well-established companies like AVI’s Snackworks (the producer of snack brands like Bakers, Baumann’s and Provita) in 2025, despite a relatively minimal investment in marketing and product development.
Another trend reshaping the consumer staples landscape is the rise of private label goods. These are products that retailers sell under their own house brand names, such as those offered by the likes of Woolworths and Pick n Pay. As consumers increasingly opt for cheaper products marketed under trusted retailer brand names, manufacturers of many popular household brands are facing increased competition and are losing market share in their respective categories.
Discipline is key
Though volatility has been heightened in recent months, it is an ever-present feature of markets. Markets go up and down, good news boosts sentiment, and bad news incites fear and panic. At Allan Gray, we do not allow headlines to sway our investment approach or attempt to time macroeconomic shifts and market movements. Instead, we seek to understand the long-term trends and identify undervalued businesses with strong fundamentals that can withstand a range of economic scenarios. By maintaining a disciplined, bottom-up approach and constructing well-diversified portfolios, we aim to protect our clients’ capital and deliver long-term growth – even in turbulent times.
For more on long-standing businesses that are reinventing themselves, listen to episode 27 of The Allan Gray Podcast. Portfolio managers Rory Kutisker-Jacobson, Jithen Pillay and Siphesihle Zwane discuss companies, including BAT, AB InBev and Disney, in depth.