The Good: Catch Me If You Can

Diversification is considered by many to be a fundamental rule of investing. This refers to diversification across asset classes, sectors, geographies and currencies. The geography part raises interesting questions. For example, how many different regions do I need to invest in to be considered diversified? What is the maximum exposure to one region? What should the split be between developed versus developing market exposure?

As a result of these questions, clients frequently ask why our global funds have such a strong US bias. The answer lies in several key factors. Firstly, the US boasts the deepest flowing capital market in the world. In turn, the US stock market represents around 60% of the global equity market, which means it is home to a disproportionately large number of the world’s leading companies. Another important point, often overlooked, is that many of these US-based companies are highly diversified, with operations across the globe. In fact, more than 40% of the revenue generated by S&P 500 companies comes from outside the United States.

Globally, it is hard to look past the dominance of the US stock market over the past 10 years. The total value of US stocks is now 4 times that of all European stocks combined. Ten years ago, that multiple was less than 2. While the US market has enjoyed stellar economic-driven growth, Europe has struggled with a fragile currency, a crisis-prone political system, and a stagnating economy. The Stoxx Europe 600 Index is currently trading at a record 40% discount to the S&P 500 and 2024 is on track to be one of its worst years in terms of relative performance.

To make matters worse, the euro recently fell to a two-year low of $1.03 against the U.S. dollar, following a report of unexpectedly weak business activity in the Eurozone. Meanwhile, Trump’s victory has sparked renewed optimism for a “stronger for longer” US dollar, with Goldman Sachs citing the planned tariffs, a thriving economy, and rising US asset prices as a “potent combination for the dollar”.

It remains to be seen whether Trump’s policy agenda — focused on deregulation and prioritising domestic businesses — will further enhance the long-standing outperformance of US equities compared to global markets. On the other hand, could the threat of Trump-imposed tariffs serve as the wake-up call Europe needs to finally take meaningful action to boost the attractiveness of its assets?

At High Street Asset Management (Pty) Ltd (“High Street”), we aim to invest in companies with dominant market positions and durable competitive advantages, who look to be set to benefit from long-term trends we have identified. Currently, most of these are US companies. While geographic diversification remains important, our primary consideration is the attractiveness of a company’s fundamentals, as we believe this is the key driver of long-term performance.

The Bad: Bond Market Curveballs

The Federal Reserve’s 50-basis-point rate cut in September and subsequent 25-basis-point cut in November has not had the expected positive impact on fixed-income markets investors were hoping for. Historically, rate cuts drive bond prices higher and yields lower. However, since the September cut, yields on the benchmark 10-year U.S. Treasury notes have risen by approximately 70 basis points.

Several factors are causing this trend. Stubborn inflation in the United States—fuelled by rising costs in sectors like auto insurance and healthcare—continue to strain consumer budgets. Meanwhile, resilient economic indicators, such as robust employment figures and strong consumer spending, suggest the U.S. economy is still firing on all cylinders. This resilience has raised expectations that the Federal Reserve may keep rates elevated for longer.

Further pressure has come from political turbulence following the recent U.S. elections. Donald Trump’s victory and the Republican clean sweep of the House and Senate have raised concerns about the reinflationary effects of proposed tax cuts and other policies aimed at stimulating economic growth. Additionally, these measures could add more debt to an already substantial fiscal deficit.

Despite these challenges, fixed-income assets remain an attractive option, especially within a balanced multi-asset portfolio. One key advantage lies in the opportunity to lock in decade-high yields which provide investors with a stable source of income. Additionally, elevated bond yields create an attractive opportunity for investors to capitalise on duration risk, potentially realising capital gains if interest rate expectations decline in the future.

& the Speculation to Sovereignty?

Bitcoin, the polarising cryptocurrency, has once again captured global attention. After losing ~78% of its value between November 2021 and late 2022, it has staged a remarkable recovery, surging over 440% in the past two years. Alongside general speculation, this rally has been bolstered by a more supportive regulatory environment. Bitcoin ETFs were approved in the US in early 2024, significantly enhancing accessibility for both institutional and retail investors. Despite its beginnings as a volatile, speculative asset, Bitcoin’s place in global finance continues to evolve, with some suggesting it could even play a crucial role in national monetary policy.

Rising debt levels, widening income inequality, and escalating geopolitical tensions have fuelled growing discontent over the US dollar’s position as the global reserve currency. BRICS countries are increasingly seeking to “de-dollarise”, promoting a new common currency for trade and investment. Against this backdrop, Bitcoin has emerged as a potential alternative, not only globally but also within the US. Wyoming Senator Cynthia Lummis recently proposed a bill to establish a “strategic bitcoin reserve”. Her legislation suggests using Federal Reserve surpluses and revalued gold reserves to buy Bitcoin, locking a million coins in Treasury storage until 2045. Proponents argue this would diversify U.S. assets, but critics highlight risks including illiquidity and volatility.

The United States need not look far for a case study. El Salvador, a Central American nation of around 6m people, became the first country to adopt Bitcoin as currency in June 2021. It has since accumulated over 6,000 coins in its national reserve, worth around $522m at current prices—roughly 1.5% of their GDP. However, although the value of the nation’s investment has doubled, the success of this bold experiment is still unclear. A new survey found that less than 10% of citizens have used Bitcoin to make transactions, and President Nayib Bukele recently admitted that it “has not had the widespread adoption we hoped”. For many, Bitcoin remains poorly understood, and it has a long way to go before achieving global acceptance—if it ever succeeds at all.

At High Street, we view Bitcoin with caution. While we recognise its impressive rebound and speculative appeal, we do not invest in cryptocurrencies within our funds and products. Bitcoin’s evolution symbolises the potential for innovation within the financial industry, but our focus remains on delivering long-term, sustainable growth by investing in assets with clear, measurable value.