Reshaping client portfolios for Gen Z and obesity
If you ever find yourself yearning for a keep-it-simple-stupid (KISS) explainer of the economy and investing, you could do worse than attend one of The Times events hosted by Allan Gray. Your writer was lucky enough to occupy a front-row seat at the asset manager’s recent in-person, client-focused event.
Financial market rollercoaster
Duncan Artus, chief investment officer (CIO) at the firm, was on hand to unpack today’s volatile market in the context of domestic collective investment scheme (CIS) decision making. “This has probably been one of the hardest roadshows for us to put together,” he said, lamenting the difficulty of preparing a slideshow one month in advance. To illustrate the challenge, he pointed to the absurd volatility in financial markets, both locally and globally. In just two weeks, the JSE All Share Index moved from 91000 points to 78000, and back again.
Rather than speculating on market movements, the CIO opted to share how his team approaches asset allocation and equity selection. “We might not know what is going to happen in financial markets, but we do know the features we are monitoring,” Artus said. “We want to show you how our investment team thinks around [today’s craziness].” Your writer felt ‘today’s craziness’ was apt, given United States (US) President Donald Trump’s Liberation Day tariff announcements, the on-again-off-again trade tension since, and the more recent South African delegation to the White House.
A businessman, a golfer, and a trade unionist walk into a bar…
The Times event coincided with National Budget 3.0 and the long-awaited public meeting between Trump, President Cyril Ramaphosa, and a South African entourage made up of a businessman, a Minister of Agriculture, two world-renowned golfers, and a trade union representative. If one goes by movements in the domestic bond market, then the third iteration of the National Budget was well received, but it was too early to speculate on outcomes from the US meeting.
Artus turned to the US’s stance on trade. He noted that a global trade imbalance had been brewing for decades, singling this out as one of three major trends driving financial markets. “China makes roughly a third of all the goods produced in the world but only consumes 12% whereas America consumes almost 30% and only produces 15%,” he said. “That is why you see US debt sitting at over USD36 trillion.” According to Artus, the last time things were this skewed was around the time of Bretton Woods, post-World War II, and during the Plaza Accord in the 1970s.
AI is just getting started
The second trend investors should note is the next leg of the artificial intelligence (AI) evolution. Artus shared a slide showing the rolling 12-month capital expenditure by the so-called Magnificent Seven stocks. In 2017, these companies burned through USD50 billion, mostly on tech infrastructure; by the end of 2024, the figure had ballooned to USD250 billion. For perspective, South Africa’s entire economy is worth about USD390 billion.
Ironically, the more these companies divert to capex, the higher their market valuations have risen. The Magnificent Seven now make up a disproportionate share of major US indices, consuming an ever-larger portion of equity exposure in passively managed portfolios. “If you wind the clocks forward 15 years, who is going to be the winner from AI?” Artus asked. It might be all of the Magnificent Seven, or some of them, or ten companies you have never heard of.
China, China, China…
China’s evolving role in the global economy is the third key trend for South African investors to monitor. If you need convincing, just consider the market capitalisation of JSE-listed Naspers. This counter is a proxy for Tencent Holdings, and its prospects are tightly bound to economic and regulatory signals from the world’s second-largest economy. The fortunes of local mining shares, and luxury brands such as Richemont, are also tied to Chinese demand. Artus raised concerns about lagging consumer confidence following the multi-year collapse in China’s residential property market.
It is excruciating for portfolio managers to build risk and return certainty when faced with too many unknowns. Case in point: in the lead-up to South Africa’s national elections, Allan Gray had no way of knowing that a relatively stable Government of National Unity (GNU) would emerge. “We wanted to own positions that would protect against the left tail, the less positive outcome, but also assets that would do well if things turned out better,” Artus said. Had South Africa ended up with an ANC–EFF–MK alternative, bond yields would not be at 10%, nor the rand at R17.80 to the dollar.
SA through a Mr Price lens
Pre- and post-election sentiment can be viewed through changes in the Mr Price share price, which Artus said had got ahead of itself. “Mr Price is a good proxy, because it basically sells to South Africans, and it relies on the economy and consumers,” he said. The share doubled from R150 per share pre-election to R300 by December 2024, before retreating to a more realistic level around R240.
Turning to the firm’s core domestic holdings, Artus noted that two of Allan Gray’s top three positions are in consumer staples: AB InBev and British American Tobacco. “These are some of the world’s strongest brands,” he said. “And yet, incredibly, over two decades, you would have done better simply owning the index.” That long-term underperformance has sparked internal debate. Are these durable brands now undervalued, or is their business model broken?
Several structural headwinds are weighing on these companies. One is the rise of weight-loss drugs such as Ozempic and Wegovy. “Everyone knows someone who has lost 25% of their body weight,” Artus remarked. “They all say they have been going to gym, but we know they are on the drugs.” Shifting consumption is triggering real concerns about future demand for snacks, soft drinks, chocolate, and alcohol. “Every analyst call is asking: What does this mean for Coca-Cola? For Hershey? For AB InBev?”
On beer and billionaires
Allan Gray’s team was recently invited to present to the global board of AB InBev during a strategy session in South Africa. “There were a few billionaires in the room,” noted Artus. The session focused on shifting consumption and the structural risks facing beverage companies. Interestingly, AB InBev’s leadership appeared less concerned about the impact of weight-loss drugs on beer than on wine and spirits.
One bright spot for AB InBev is its growing non-alcoholic portfolio, including Corona Zero and other beyond-beer innovations. “Corona Zero actually sponsored the Olympics,” Artus pointed out, illustrating how alcohol-free products are opening new channels and marketing opportunities. These offerings are gaining traction globally and could help offset broader volume pressures.
Longer-term generational shifts add further complexity. “Gen Z are drinking less. Not because they’re moralists, but because it’s become cool not to drink,” said Artus. He linked this trend to the impact of lockdowns. “Instead of going out, they stayed home, lived on their phones, and learned to socialise differently.” At the same time, inflation and rising cost-of-living pressures are making consumers more price-sensitive. Private label goods are gaining share in many markets.
Mr Beast takes on Oreo etc.
Perhaps the most disruptive trend of all is the erosion of traditional brand-building. “Mr Beast built a USD250 million confectionery business in two years just using Shopify and YouTube,” said Artus. “It took companies like Hershey or Nestlé decades, and hundreds of millions in marketing, to get that kind of traction.” For brand-heavy staples businesses, the implications are significant. “These trends are not just anecdotes; they are reshaping entire sectors,” he concluded.
For financial advisers, it makes sense to leave the heavy lifting around asset allocation and stock picking to the pros. You can let the investment teams at your preferred asset management partner make the tough calls on the bonds, cash and equity exposures in your clients’ portfolios. And you can leave it to them to figure out how emerging trends will impact the return profile of individual companies, industries, or sectors.
Writer’s thoughts:
Some of the biggest shifts in portfolio risk do not come from markets, but from changing consumer behaviour. Is this something your clients expect you to navigate, or are they happy to defer the takes to their preferred portfolio managers? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
