Alpine Capital Investor Report - Q1 2025

1.     Introduction and Market Data

We are proud to launch the inaugural edition of Alpine Capital’s quarterly newsletter, which we consider a significant milestone. We sincerely appreciate the confidence you have placed in us to manage your diligently earned capital, a responsibility we undertake with the utmost seriousness and dedication. Our investment approach remains firmly rooted in identifying and capitalising on global opportunities for our clients. Accordingly, this newsletter will focus predominantly on significant international developments and their influence on our strategic outlook.

The first quarter of 2025 has proven to be a period of considerable upheaval, predominantly driven by geopolitical factors, with the policies of the Trump administration playing a central role. This has precipitated a shift in market sentiment reversing the optimism that characterised the preceding two years of robust market performance and strong portfolio returns. The volatility was particularly pronounced in US equities. In our opinion, the prevailing negative sentiment which has been amplified by market reactions and media coverage, does not fully reflect the underlying reality. Corporate earnings in the US continue to exhibit vigorous double-digit growth, significantly outpacing the more modest single digit increases observed in Europe.

Nevertheless, the performance of US equities diverged from initial expectations, underperforming on a relative basis.

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The S&P 500 recorded a decline of 4.3%, signalling a retreat from its earlier highs, while global indices presented a varied landscape. The MSCI World index fell by 1.8%, MSCI Europe achieved a notable gain of 10.5%, MSCI Japan registered a marginal increase of 0.3%, and MSCI Emerging Markets advanced by 2.9% (all figures in USD). This divergence underscores a quarter of unexpected outcomes, with Europe’s robust performance contrasting sharply with the US downturn. Does this development cause us concern? Are we witnessing the erosion of American economic pre-eminence, with Europe and other regions poised to assume greater prominence? We believe not. Rather, we interpret these movements as a short-term disruption rather than a fundamental geographical realignment. The global economy is currently experiencing a state of disarray, engendered by rapid policy shifts and geopolitical tensions which have introduced short-term obstacles. These conditions may well establish a cautious trajectory for the remainder of 2025, probably a year of consolidation rather than pronounced growth. Our perspective, however, remains oriented toward the long term, where we continue to identify substantial opportunities amidst the present uncertainty.

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2.     Tariffs Are Breaking the Market

The imposition of tariffs presents a complex challenge as their benefits are seldom universally distributed. These measures elevate costs, disrupt established supply chains, and introduce artificial distortions into the global economic framework—effects that are currently manifesting with significant impact. Enterprises across various sectors from manufacturing to retail find themselves in a state of operational paralysis, unable to formulate effective strategies amid the uncertainty surrounding the scope and implementation of these tariffs. The Trump administration has acted decisively, fulfilling campaign commitments with a focus on tariffs and the DOGE initiative, an effort aimed at enhancing governmental efficiency and addressing ever increasing budget deficits and inflated levels of national debt. These actions have captured the attention of investors and dominated financial discourse, and we acknowledge the administration’s determination. The United States has long served as a steward of the global economy often at a disadvantage due to trade imbalances exploited by other nations. Addressing this inequity is a justifiable objective, one we support in principle.

However, the manner of implementation has proven disruptive. The Federal Reserve’s GDP Now estimate, as of April 1, 2025, provides a quantitative reflection of this turmoil, though we assign limited credence to such forecasts as definitive predictors.

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They do nonetheless serve as an indicator of the prevailing uncertainty within current economic data. The tariff policy has been characterised by a pattern of rapid introduction, partial retraction, and subsequent reinstatement, creating a volatile environment that challenges market stability. While we commend the intent to rectify trade disparities, a more measured and strategic approach would better accommodate the complexities of an interconnected global economy. Speculation has emerged regarding potential political repercussions, with suggestions that Commerce Secretary Howard Lutnick may be positioned as a figure of accountability for the policy’s uneven rollout. Such conjecture remains unconfirmed, yet it highlights the intensity of the current climate.

For our clients, the critical questions revolve around the implications for investments. The accelerated pace of these policy shifts renders precise impact assessments exceedingly difficult, complicating decisions regarding portfolio adjustments. Should we pursue proactive repositioning, or will these disturbances prove temporary? At present, definitive answers elude us, a reflection of the broader ambiguity confronting the investment community. What we can assert with assurance is our unwavering confidence in the enduring resilience of the American economy. These challenges represent a phase of adjustment rather than a structural decline, and we anticipate that the US will navigate this period with its long-term potential intact.

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3.     Why we rate the US so highly

Alpine Capital’s investment philosophy is anchored in fundamental principles guided by a rigorous evaluation of what generates sustainable returns. Extensive evidence demonstrates that capitalism, with its emphasis on shareholder value, remains the most effective mechanism for wealth creation. While some may advocate for alternative priorities—such as social responsibility or environmental, social, and governance (ESG) criteria—we maintain that our mandate is singular: to maximise financial returns for our clients. Those who have entrusted us with their capital expect this focus, and we are resolute in adhering to it. Considerations beyond financial performance, while valid in other contexts, are not within our purview; they are best addressed independently by individuals.

The United States exemplifies this capitalist paradigm more than any other nation. It stands as the preeminent hub of global economic activity, hosting the world’s largest, most profitable, and most influential corporations, many of which form the backbone of the S&P 500. These entities are not merely domestic players; they are global enterprises deriving substantial revenue from international markets—28% for the S&P 500, 46% for the technology-centric Nasdaq, and 49% for the so-called “Magnificent 7,” a group encompassing industry leaders such as Apple and Amazon.

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Investing in these types of firms provides exposure to the global economy, channelled through a system singularly dedicated to profit generation. This focus is palpable in the culture of American business, particularly on Wall Street and within corporate boardrooms, where the pursuit of shareholder value is paramount—a distinction evident to anyone who has experienced the contrasting economic environments of Europe, Africa, or beyond.

This competitive advantage is underpinned by deliberate strengths. The US attracts the foremost talent globally, from innovators to financial experts, and supports them with the most extensive and liquid financial markets in existence. By comparison, Europe remains ensnared in a persistent low-growth environment, a condition attributable to multifaceted factors including unresolved immigration challenges, a prevailing attitude of complacency, and the structural inefficiencies inherent in the European Union. The EU’s formation, while ambitious, has fostered a bureaucratic apparatus ill-suited to harmonising the diverse economic and cultural priorities of its member states, resulting in a region that increasingly resembles a historical showcase rather than a dynamic economic force. China, often cited as an emerging opportunity, presents a different set of obstacles. Its market is constrained by capital controls, political interventions, and a lack of priority on shareholder returns, evidenced by the negligible gains delivered by its broad indices over the past three decades. It is a market suited to tactical trading rather than sustained, principled investment.

The Trump administration’s pro-business orientation further bolsters the US’s long-term appeal. Its strategy to address a $2 trillion annual budget deficit—through $1 trillion in expenditure reductions via DOGE efficiencies and an additional $1 trillion from leveraging tariffs, oil, and natural resources—reflects a bold, albeit ambitious, agenda. Sceptics may deem it impractical or opportunistic, yet our extensive review suggests a genuine commitment to its realisation. Implementation will require time and refinement, but it aligns with the foundational attributes that define American economic strength: adherence to the rule of law, a robust capitalist framework, and effective corporate governance. Moreover, as technological advancement reshapes global consumption patterns, the US is uniquely positioned to lead. Consider the centrality of smartphones and digital services in daily life—tools so indispensable they rival necessities like food and shelter. American technology firms dominate this domain, no longer merely companies but also modern utilities. As such they are poised to capture an expanding share of global financial flows. This enduring potential reinforces our high regard for the US as one of the cornerstones of our investment strategy.

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4.     South Africa and the ZAR

Our approach to South Africa remains one of measured restraint, with client allocations deliberately underweighted. Our investment philosophy dictates a preference for environments where capitalism can thrive unimpeded, a standard that the current South African context fails to meet. The nation continues to experience persistent capital outflows, driven by a combination of political instability, economic stagnation, and policies that do not sufficiently prioritise investor interests. This trend, far from abating, reflects a structural challenge that limits our enthusiasm for significant exposure. Observers have long contended that the South African Rand (ZAR) is undervalued, a view rooted in analysis of purchasing power parity and historical norms. Yet, this optimism has been consistently undermined by practical realities. Even under the relatively favourable conditions following the establishment of the Government of National Unity (GNU), the ZAR reached a high of approximately R17 to the USD, a level that casts doubt on aspirations of a return to R16 or below, particularly given the prevailing global uncertainties.

In response, the South African Reserve Bank (SARB) has adopted a defensive posture, maintaining some of the highest real interest rates globally to bolster the ZAR against further depreciation. This strategy has provided a degree of stability, mitigating more severe currency weakness, and has rendered South African bonds an attractive proposition. These instruments offer substantial real returns, distinguishing them from many international counterparts and appealing to investors seeking income in a volatile world. The equity market, however, presents a less compelling case. While valuations appear discounted relative to historical benchmarks—a so-called “valuation buffer”—we remain cautious. Value alone does not guarantee appreciation; a catalyst is essential to unlock potential, and such a trigger remains elusive. Political and economic conditions may need to deteriorate further before a meaningful recovery can take root, a prospect that tempers our expectations and reinforces our limited allocation to this market.

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5.     Outlook

Financial markets operate most effectively in conditions of clarity, and their aversion to uncertainty has been starkly evident throughout Q1. Nevertheless, there are indications that the prevailing risks may already be reflected in certain asset prices, suggesting that we may be approaching a stabilisation point rather than facing further persistent declines. Should market weakness persist, South African investors may find a mitigating factor in a depreciating ZAR, which would offset global losses by enhancing returns in local currency terms—a practical consideration for our clients based in South Africa. Concurrently, bond yields have trended downward, signalling heightened concerns regarding economic growth prospects. This environment has prompted corporations to adopt a conservative stance, deferring capital expenditures, acquisitions, and expansion initiatives until greater visibility emerges. The duration of this restraint will be a pivotal determinant of the economic trajectory in the months ahead, whether it spans a brief interlude or extends into a more prolonged period.

Valuations, though still elevated by historical standards, have eased off their peaks, a reset we welcome. The S&P 500’s forward 12-month P/E ratio has dipped to 20.5 from 21.5 at Q4 2024’s close - a modest but meaningful breather. What is more important is that certain equities have experienced a larger valuation reset, evaporating a lot of bubble talk and creating opportunity.

A prominent risk on the horizon is the potential onset of stagflation—an economic state characterised by stagnant growth, rising inflation, and increasing unemployment—exacerbated by the disruptions stemming from tariff policies. These measures have introduced logistical complexities and supply chain bottlenecks, creating a challenging operational landscape for businesses worldwide. We remain optimistic, however, that a pragmatic resolution will emerge, with the Trump administration likely to moderate its approach at a critical juncture to avert more severe consequences. The recent weakening of the US dollar against major currencies, influenced by revised central bank rate expectations and outflows of capital amid anti-US sentiment, adds an additional layer of complexity. Europe’s tentative signs of growth warrant attention, though we do not anticipate this as a sustained trend over the long term, given the region’s structural limitations.

Concerns regarding declining AI costs, exemplified by developments such as Deepseek, have unsettled some market participants, yet we perceive this as a natural and beneficial progression. Reductions in AI-related expenses are a prerequisite for the technology’s widespread adoption, enabling the development of practical applications and services that can reach a global audience. This trend supports our constructive outlook on the semiconductor sector, which we expect to benefit significantly over an extended horizon. Our client portfolios have experienced minimal adjustments during this quarter, a deliberate choice reflecting our belief that reactive shifts in response to short-term volatility often prove counterproductive. We take considerable comfort in the quality of our holdings—established companies with exemplary track records and the capacity for substantial growth over the next five years and beyond, with management that can navigate a complex environment—with a continued focus on the broad technology and semiconductor sectors. We expect the short-term to be a tough period for equity investors, but it remains a small price to pay to achieve meaningful returns above cash over the long-term. Declines in share prices are met not with apprehension but with opportunity, allowing us to acquire additional positions for clients with available capital or to introduce new investors to these assets at advantageous valuations.