Allan Gray | Orbis Global Balanced: Defensively positioned to deliver long-term returns

The Orbis SICAV Global Balanced Fund remains cautiously positioned with severe underweight exposure to the US dollar compared to its benchmark. Alec Cutler and Rob Perrone from our offshore partner, Orbis, discuss how the landscape is evolving and how Orbis is thinking about the portfolio.

This commentary was compiled at quarter-end (31 March 2025).

Uncertainty is the order of the day in the US, and that is not what markets were expecting in January. Coming into the year, the US stock market traded at sky-high valuations, having notched two consecutive years of 20% plus returns. Strong equity returns, strong profit growth, strong economic growth and a market-friendly Trump were all priced as virtual certainties. With investors bullish on America’s stock market and economy, Treasury yields rose and the dollar strengthened.

That made us cautious. When prices are high, expectations are high, and when expectations are high, so is risk. Fortunately, those high expectations were concentrated in the US, as markets elsewhere were roundly neglected.

We were positioned against the consensus narrative of American exceptionalism. Only about 10% of the Orbis SICAV Global Balanced Fund (the Fund) was exposed to the US stock market. We were steeply underweight the dollar, which to us looked breathtakingly expensive versus other currencies, especially the cheap Japanese yen and Norwegian krone. We held substantial exposure to gold – a guardian against stagflation, a hedge against geopolitical risk, and the original anti-dollar asset. And with companies elsewhere broadly ignored, we found compelling stockpicking opportunities all over the globe.

We remain defensively positioned

We are still positioned that way, because prices haven’t changed all that much. For all the headlines about its decline since late February, the S&P 500 is down less than 5% year to date. It still trades at valuations rarely seen outside of market bubbles, it still carries a steep premium to markets elsewhere, and it still commands a near-70% share of world stock markets. While there are increasing signs that the US economy is rolling over, Treasury bonds offer roughly the same yields now as they did on election day. The dollar has weakened a little, but still looks richly overvalued versus other major currencies.

Over the past quarter, we have meaningfully increased our positions in long-term US Treasury Inflation Protected Securities … they offer higher returns and cheaper inflation insurance.

As a result, we have continued to shift the portfolio in a defensive direction. Net of hedging, we have less exposure to stock market risk than the 60/40 index benchmark, and our fixed income holdings are longer-term than they have ever been. In addition to valuations, we have concerns about the US cycle. Its economy is vulnerable to any weakness in the stock market, and neither the White House nor the Federal Reserve (the Fed) seems inclined to help.

Witnessing the “wealth effect” in the US economy

Two-thirds of US gross domestic product (GDP) is consumer spending. Over half of that spending, and all of the spending growth over the last two years, has been driven by the top 20% of households by income. While those on lower incomes are feeling stretched, wealthy people have been happy to keep splurging, because the stock market has been up so much. By the end of last year, the value of US households’ equity holdings had swelled to US$47tn, and high earners owned 87% of that. As the stock market has soared, it has grown larger versus the US economy. Today, the S&P 500 is valued at about 160% of US GDP, versus an average of 95% over the last 30 years.

Said another way, the US economy has become more financialised, and thus more dependent on the stock market. Researchers from Moody’s, among others, have tried to put numbers on this “wealth effect”. They estimate that for every extra dollar in household wealth, households spend an extra two or three cents. Over the past few years, this has been a boon for the economy. But now, the economy depends on consumer spending, the only consumers spending are the rich ones, and their spending depends on rising stock markets.

The market, for the moment, anyway, has stopped going up. What does that spell for the economy? It’s easy to see how downward trends could feed on each other. A slumping market makes wealthy people rein in spending. That pullback weakens the economy, prompting fears of a recession. Those fears rattle investors, weighing on the stock market. Feeling less flush, consumers pull back some more, and so on.

Is it time to buy?

At most points over the last 15 years, this would look like a time to buy the market dip, because the government and central bank would pump money into the economy at the first sign of trouble. This time, that looks unlikely.

Consider the government’s side first. The American poet Maya Angelou said, “When someone shows you who they are, believe them the first time.” Investors would do well to heed that advice, particularly regarding President Trump and Treasury Secretary Bessent. A selection of quotes from Trump:

“There is a period of transition.”
“I hate to predict things like that [recessions].”
“Look, we’re going to have disruption, but we’re okay with that.”
“There’ll always be a little short-term interruption.”
“I’m not even looking at the stock market.”

And from Bessent:

“There is no [Trump] put.”
“There’s going to be a detox period.”
“We’ll see whether there’s pain.”
“Could we be seeing this economy that we inherited starting to roll a bit? Sure.”
“Can you guarantee there is not going to be a recession? I can’t guarantee anything.”

If the president and Treasury secretary are willing to stomach a recession in pursuit of their longer-term policy goals, who are we to argue? Both are explicit in their desire to bring down the 10-year US Treasury yield, and allowing a short-term recession would be one way to do that.

The Fed is stuck between a rock and a hard place

Normally, it would then fall to the central bank to support the economy, but the Fed is stuck between its dual goals of limiting inflation and limiting unemployment. Low- and middle-income households are stretched, hiring and wage growth are slowing, and small businesses are in a dour mood. That might suggest lower interest rates, but inflation is proving sticky, and inflation expectations are rising, with both consumers and businesses worrying about tariffs. A central bank can look through “transitory” inflation from tariffs, but if enough people fear inflation, those fears can become self-fulfilling. Faced with this uncertainty, the Fed has admitted that it doesn’t even know which of its two goals to prioritise. If the Fed raises interest rates to fight inflation, it risks crushing the economy, but if it cuts rates to support the economy, inflation expectations could rise rapidly.

Both scenarios would be reasonable for US Treasury Inflation Protected Securities (TIPS). As a reminder, TIPS are Treasury bonds where the repayment amount is adjusted for inflation. If interest rates and bond yields decline, TIPS should benefit, as bond prices go up when bond yields go down. If rates stay high or rise, the most likely reason would be high inflation, and TIPS should benefit from adjustments to their repayment amount.

Over the past quarter, we have meaningfully increased our positions in long-term TIPS, and they are now among the Fund’s top holdings. Long-term TIPS offer higher inflation-protected yields with lower inflation expectations than their shorter-term cousins. In other words, they offer higher returns and cheaper inflation insurance.

Longer-term, the 2.3% inflation-protected yield on 30-year TIPS is both above average versus historical bond returns and, in our view, unsustainably high given America’s government debt problem. If your economy grows by 2% per year above inflation, but your debt costs 2% above inflation, it is fiendishly difficult to reduce your debt-to-GDP ratio, even if you run minimal budget deficits. In time, US policymakers may look for ways to bring these yields down.

If we can lock in a 2.3% real return on a fairly safe asset, this raises the bar for everything else in the portfolio. With equity valuations still reasonable outside the US, we’ve found plenty of opportunities, but the biggest competition for capital in the Fund today is between TIPS and hedged equity.

Hedged equities are also competing for our attention

Hedged equity lets us buy stocks we like in markets we don’t – we buy individual stocks that we believe are undervalued, then hedge out some of the associated stock market risk. This leaves us with the difference between the return of our stock and the return of its local market, plus a cash-like return.

… we believe the Fund is well positioned to both handle market volatility and deliver pleasing long-term returns.

Today, the market where we are most concerned about broad valuations – the US – is also the market with the highest interest rates, so US hedged equity offers a cash return of about 4%, plus the relative return of our stock selections. With pockets of undervalued equities still available in the US, that makes hedged equity a very competitive option for the lower-risk part of the Fund.

Dual purpose

Nobody rings a bell when the market turns, and trying to time these moves in advance is a fool’s errand. We would rather respond to prices. In the US, prices continue to embed high expectations – perhaps too high. The past weeks suggest those expectations may be starting their descent to more reasonable levels.

With little exposure to the US stock market and dollar, defensive positioning in TIPS and hedged equity, and a collection of attractively valued shares, we believe the Fund is well positioned to both handle market volatility and deliver pleasing long-term returns.