March 2024

Insights

The Good: The Eternal Metal

Known as the ‘Eternal Metal’, copper has played an essential role in many of mankind’s greatest advancements. It is the world’s third most utilised metal, and holds indispensable importance across various industries globally. Likely the metal most synonymous with electrification, copper is key for the green energy transition. From wind turbines to solar panels, copper is everywhere. Simply put, the road to ‘net zero’ begins and ends with this commodity.

Commodity prices, like all assets, are governed by the interplay of demand and supply. On the demand side, copper presents an intriguing case, currently torn between the strains in more traditional consumption areas and the surging renewable energy demand. China stands out as the major consumer, accounting for over half of global copper consumption. However, its post-pandemic recovery has stumbled due to a struggling property market, severely impacting copper demand within construction, a sector that accounts for roughly a quarter of China’s copper use.

Nevertheless, copper demand is forecasted to grow steadily, fuelled by the accelerating demand from the energy transition. This is attributed to the expanding market share of electric vehicles (EV) and the record number of clean energy installations. The chart below underscores the substantial role electric vehicles will play in this future growth, with each typical EV containing nearly four times more copper than conventional vehicles, requiring up to 80kg of copper per vehicle.

 

Source: International Copper Study Group, Julius Baer

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:

Source: S&P Market Intelligence

With rising demand and scarce new supply prospects, we anticipate long-term support for copper prices, positioning it as our preferred commodity at High Street. Major diversified miners have also demonstrated confidence in copper’s future by actively pursuing significant acquisitions of copper assets, often at substantial premiums. This shift follows years of subdued M&A activity in the sector.

At High Street, we gain exposure to this global trend through investing in mining companies with significant copper assets, namely Teck Resources, Glencore and BHP Group. As a general rule of thumb, commodity prices drive around 80% of mining companies’ share price performance and these companies are well positioned to gain from robust copper prices.

The Bad: A(I) World Reimagined

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.

 

 

This is not the first time an AI tool has caused controversy. In 2016, Microsoft’s disastrous Twitter chatbot, Tay, became an example of what AI could produce with unsupervised data. Adobe and OpenAI also had issues with their AI tools, where negative stereotypes were applied. This was the genesis for introducing a diversity, equity, and inclusion (DEI) buffer required for large language models (LLMs) to create more socially acceptable and accurate responses.

The Gemini saga is an example of a blanket overcorrection. The number of controversies across different companies points to a wider issue with the technology rather than specific political censorship from Google. LLMs are extremely prone to exaggerating bias, and companies are struggling to balance correcting for this bias while producing accurate results.

These issues have led us to closely scrutinise management’s reaction over the next few months. Despite this, Alphabet remains a serious player in the AI race, and therefore our thesis currently remains unchanged. They have an unmatched trove of data to train models across all forms of media, with a huge user base across its Search, YouTube, Android, and Cloud segments. Furthermore, the controversy does not seem to have affected the company’s standing with other firms, as Apple is reported to be in negotiations with Google to integrate Gemini into the iPhone.

At High Street, we believe that LLMs and other advanced AI tools are revolutionary technologies that will be implemented across almost all industries. Therefore, we hold a variety of companies within our Funds and Products, such as Alphabet, that are embracing this technology or are powering this ‘revolution.’

 

& Walking Along the High Street – Part One: South African Offshore Investment Specialists

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.

In this month’s edition, we delve into how High Street differentiates itself in the South African asset management industry by offering specialised offshore investment strategies catering to both institutional and retail investors. As a boutique asset manager, we leverage our flexibility to adapt and innovate, providing clients with unique solutions to meet South African specific needs. We aim to highlight our distinct approach and illustrate how High Street strives to deliver value to our clients. To read further, please click the link below:

Walking Along the High Street

 

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