September 2024

Insights

The Good: A Rand Revival

The South African Rand has recently experienced a resurgence, appreciating significantly against major currencies such as the US Dollar, Euro, and British Pound. This shift can be attributed to several South African-specific factors, including renewed optimism in the political landscape following the formation of a Government of National Unity, as well as a marked reduction in load shedding. These developments have fostered a positive sentiment around the Rand, which has contributed to its strength with foreign investment inflows ticking up off a low base.

Source: High Street Asset Management via Bloomberg on 26 September 2024

Interest rates also play a crucial role in currency movements. On September 19th, the South African Reserve Bank (SARB) lowered its main lending rate from 8.25% to 8%, just one day after the US Federal Reserve cut its benchmark interest rate by a historic 50 basis points. These moves generally result in a depreciation of the currency following a reduction in demand as investors seeking a generous yield tend to look elsewhere. With the rate-cutting cycle underway that was preceded by lower inflation across most of the globe, the discussion has shifted to the magnitude of impending rate cuts. A hawkish Reserve Bank governor and a cut of only 0.25%, compared to 0.5% in the US, have seen yield-hungry investors flock to the Rand. The perseverance of this trend will be dictated by which governor adopts a tighter monetary stance moving forward.

Interest rates are not only influential in exchange rates but also in pricing stocks. Lower discount rates used in valuation models lead to higher prices and vice versa. In analysing data since 1974, the S&P 500 has seen an average gain of 15% (in USD) one year after the first rate cut. Moreover, as many S&P 500 constituents are multinational companies, a decline in the US Dollar enhances their revenues generated in countries with appreciating currencies, translating to higher earnings and greater benefits for shareholders.

Source: Morningstar, Ned Davis Research, Patient Capital, Bloomberg

For South Africans, a stronger Rand means cheaper imports, which helps to reduce inflation and benefits consumers. For investors, the strengthening Rand increases the allure of offshore investments, enabling South Africans to diversify their portfolios more affordably.

The Bad: Break-Ups

In 2024, the US Department of Justice (DOJ) has garnered attention for several high-profile lawsuits, the latest of which targets the multinational payment-processing company Visa. The DOJ claims that Visa operates as an illegal monopoly, unlawfully accumulating the ability to impose fees that far exceed what would be possible in a competitive market.

Another significant case this year involves Alphabet, Google’s parent company, which faced a second antitrust lawsuit from the DOJ in September. This comes just a month after losing a landmark case concerning its monopoly in internet search. In this latest lawsuit, Alphabet is defending itself against allegations that its advertising business operates as a monopoly, resulting in higher ad prices for customers. The DOJ is considering the possibility of breaking Alphabet into smaller companies, marking the agency’s first attempt to dismantle a company for illegal monopolisation since the failed efforts to break up Microsoft two decades ago. 

Source: Hasbro inc. ‘Monopoly’

Alongside Alphabet, Apple has been its ‘Magnificent 7’ peer that has faced three DOJ lawsuits in 14 years. The DOJ filed a case against Apple for violating antitrust laws, with this time the case revolving around how Apple has used its locked-down iPhone ecosystem to build a monopoly.

The DOJ has also intervened to block significant mergers this year, particularly the proposed merger between US regional airlines JetBlue and Spirit. The DOJ argued that the deal would raise fares for price-sensitive consumers by removing the discount carrier from the market.

Lawsuits like these from the DOJ heighten the associated regulatory risk of the company which may cause risk-averse investors to reconsider their position. Such shifts can place downward pressure on share prices in the short term, as the market reacts to potential fines, operational changes, or even forced divestitures. Furthermore, heightened regulatory risk may lead investors to favour companies with more robust compliance frameworks or diversified portfolios, impacting overall market dynamics and competition within the industry. In the long term, while the immediate effects on share prices can be significant, the underlying fundamentals of a company may recover if it successfully navigates these regulatory challenges.

& Patience Pays

Persistence and conviction are often essential ingredients for success in many aspects of life, and investing is no exception – provided these convictions are rooted in sound fundamentals. Numerous studies emphasise the advantages of staying invested and focusing on ‘time in the market’ rather than attempting to ‘time the market.’ Maintaining discipline and patience during periods of volatility has consistently proven to be a key driver of long-term investment success. The image below illustrates the benefits of looking beyond market volatility and staying invested.

Source: Visual Capitalist, August 2023

In a recent addition of our newsletter, we covered the global tech outage caused by a faulty update from one of CrowdStrike’s cybersecurity platforms, which left users worldwide staring at Microsoft Windows’ infamous ‘Blue Screen of Death.’ In the aftermath, CrowdStrike’s share price plummeted, dropping 44% from its 2024 peak. However, the stock has since recovered somewhat and now sits 26% below its previous high.

Despite this volatility, the company’s underlying business fundamentals remain strong. While these recent moves may seem significant in the short term, it’s important to take a broader view to avoid selling your winners. Year-to-date, the stock is up 13%, and over the past two years, it has delivered an impressive, annualised return of 35%. Over five years, this figure jumps to a remarkable 40%. While CrowdStrike has not yet fully recovered from the outage-related losses, it’s essential to stay focused on the long-term outlook and not be swayed by short-term volatility, trusting your conviction in the bigger picture.

As active managers, our responsibility extends beyond identifying attractive opportunities; we must also recognise when an investment has reached its full potential. It’s crucial to differentiate between a genuine change in fundamentals and temporary market panic, which can cloud judgment and lead to premature decisions on assets that may still have room to grow. Many market timers rely on chart-based trading models as ‘sell indicators,’ but these often prove unreliable and unpredictable. While they may offer short-term signals, such models can detract from a long-term investment perspective, potentially undermining sustained growth in generating alpha (outperformance). The chart below compares the 2023 returns of various chart-based trading models against a traditional buy & hold strategy.

At High Street, we remain steadfast in our belief that strong fundamentals are the key drivers of long-term share price performance. By selecting companies with a wide economic moat and proven market leadership, we maintain a clear focus on delivering long-term value for our investors.

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