November 2023


The Good: Defying the Odds

The stock market is a strange thing, often characterised by its unpredictable nature. Going into 2023, analysts were downbeat about the prospects for global markets. Many expected a recession in the US, for very good reasons too, not least the historic interest rate hikes of 2022. However, most were wrong.

The US economy has been surprisingly resilient this year with GDP forecasts being consistently revised upwards. In contrast, the world’s next two largest economies, China and Europe, have seen their GDP expectations adjusted downwards. The chart below illustrates this well:


Source: Deutsche Bank Research, Bloomberg Finance

So why has the US economy held up so well? For one, analysts underestimated consumer savings, boosted by government grants paid during the pandemic. Unlike other countries, US consumers have been actively spending these savings, fuelling economic growth. Despite expectations of these excess savings running dry, there’s still a substantial cushion entering December. Additionally, the market overlooked the lasting impact of the 2021 zero interest rate environment. While the 2022 rate increases aimed to cool the economy, many large US companies and consumers had secured low fixed-rate financing in 2020 and 2021, mitigating the expected challenges of higher rates.

What this illustrates is that predicting economic and market movements over shorter time periods is difficult. The economic turbulence of the last four years makes this task is even harder. Of course, there is the possibility that the US may fall into a recession next year if the restrictive monetary policy does eventually weigh heavily on the economy. But who actually knows? While macro analysis is important, at High Street we place more emphasis on selecting global companies with the strongest business fundamentals, the vast majority of which are listed in the US. As a result, we are overweight the US and will likely remain so for the foreseeable future. The table below paints an interesting picture:

*MSCI US Index **MSCI ex-US Index

Source: High Street Asset Management, Bloomberg

Remarkably, US company earnings have surged by over 135% since 2007, presenting a stark contrast to the stagnant earnings observed outside the US during the same period. As one would imagine this has resulted in a substantial outperformance of US equities. Essentially, the Global Financial Crisis initiated a widespread economic downturn, from which only the US has rebounded. While past performance does not guarantee future results, these numbers bear testament to the prowess of US companies. Innovation has been the key differentiator here.

The Bad: The JSE’s Escalating Exits

While the Johannesburg Stock Exchange (JSE) stands as the largest stock exchange on the African continent, it occupies the 19th position globally in terms of market capitalisation and makes up just 1% of the global equity market. The JSE has only 287 listed companies today compared to 500 two decades ago. Over the past five years, a mere 40 companies have joined the JSE, while 130 have delisted. The dynamics of the JSE are intricately tied to the country’s macroeconomic environment and GDP growth with reduced economic activity resulting in lower profits and shareholder returns. This trend is underscored by recent instances of companies opting to delist from the exchange such as Distell, Mediclinic and Massmart.



Source: TimBukOne

The delisting trend on the JSE can be attributed to various factors, with diminishing liquidity and dwindling trading volumes standing out as significant concerns. This decline is, in part, due to a re-allocation of capital from both local and foreign investors, marked by a net outflow of approximately $50 billion in foreign equity holdings since 2013. The depreciation of the South African Rand, coupled with economic uncertainty, has led to unfavourable performance in USD terms, further discouraging investors.

The consequences of declining liquidity have a direct impact on share prices, as inadequate trading volumes prevent buyers and sellers from determining an appropriate price through dynamic negotiation. This illiquidity introduces inefficiencies into the market, causing companies to seek alternate options that provide a more attractive cost of capital such as seeking alternate exchanges to list or going private. The mispricing and inefficiencies are more acute when looking at companies outside of the Top 40 where delisting is more prevalent.

Our mandate to maximise offshore exposure enables us to mitigate the inefficiencies currently inherent in the domestic market. We do however have the flexibility to capitalise on local offerings that fit our investment criteria.


& Lucky Number Seven

While most investors would have come across the acronym ‘FAANG’, which refers to the stocks of five prominent American technology companies (Meta, Amazon, Apple, Netflix, and Alphabet), many may not be as familiar with the ‘Magnificent Seven’. This newly coined term applies to this year’s star performers (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla), which account for 28.9% of the S&P 500. These seven companies have produced a truly impressive year-to-date return of 80%, while the S&P 500 excluding the ‘Magnificent Seven’ has basically been flat. Their outperformance has been aided by the AI revolution, which has dominated headlines since ChatGPT was released.

Source: Bloomberg, Apollo Chief Economist

If active managers did not own these stocks within their portfolio, it would have been a brutal effort to try and outperform the index. The phenomenon that a small set of companies can be responsible for the large majority of the index gains can be attributed to the statistical measure known as ‘skewness’. It is nothing new, with gains in just 72 companies accounting for half of all net wealth creation from stocks since 1926.

The only way to combat ‘skewness’ and beat the market is for active managers to have concentrated positions in their highest conviction shares. If concentration concerns investors, it may be of interest to know that the current top holding of the S&P 500 index is Microsoft at a hefty 7.4% weighting with the second largest holding, Apple, accounting for 7.3%. Justifying such a concentrated position within an actively managed portfolio requires strong conviction, which should be based on a robust due diligence process. At High Street, fundamental analysis is a cornerstone of our research process, where we identify a company’s competitive advantage, growth profile, and cash generative ability to build a strong investment case.

Investors rightfully question whether the ‘Magnificent Seven’ can continue this historic run into the new year. On the back of their strong fundamentals, we believe these companies will continue to execute operationally and thus drive share price performance. This focus on fundamentals has rewarded investors this year, with our Wealth Warriors Fund having achieved a USD return of over 60%. Our Regulation 28 compliant local balanced fund has appreciated over 40% in Rands over the same period, and our Global Balanced Fund has returned over 24% in USD. All of our funds are actively managed and we generally hold 25 to 35 stocks, containing enough shares to mitigate risk, while enabling us to combat the ‘skewness’ inherent in the markets.

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