Main Street vs Wall Street
These unprecedented times have produced a number of extraordinary situations which we are having to deal with. One of these is the need to separate in your mind Main Street, the general economy and the world around you, from Wall Street, investing and global businesses.
Economies globally have been pummelled over the past few months, with many businesses having to closetheir doors for the last time and many people out of work. Some countries will be able to rebuild and return to normality. In SA, where the economy was weak to begin with, we will require brave and novel approaches to emerge from this pandemic. Our finance minister, Tito Mboweni understands what needs to be done and business has expressed its willingness to support this approach. However, we wonder whether the ANC and Trade Unions will have the will to implement the changes needed.
Markets have shown remarkable resilience over the past months, recovering most of what they lost in February and March, with the exceptions of the UK and some European markets which are yet to fully recover. This was largely caused by the tsunami of economic stimulus thrown at economies and populations, which are resulting in national debt levels the size of which has never been seen before, and interest rates which have plumbed depths not known in our lifetimes. The question is how those markets will react over time as governments try to manoeuvre economies and interest rates back to normality. In the case of South Africa this task is made more difficult by high borrowing costs for the government, a weaker situation than most and a small concentrated share market.
What to do?
We have the view that, because of the state of our economy, the agenda of the governing party and the limited spread of our equity market, it is important to consider your offshore portion of your investments where fund managers have a much wider universe to choose from. The challenges now facing us suggest that it may be prudent to have a higher offshore exposure, remembering that offshore includes:
- Money in other currencies,
- Money invested in Rand denominated offshore funds,
- The offshore component that managers have of local multi asset funds (around one third for balanced funds and one quarter for conservative funds)
- The offshore component of local shares We have also looked at locally listed shares to see what portion of their income is earned offshore and have found that this can be between 55% and 75% depending on the fund manager, which should further drive returns.