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George Herman
Chief Investment Officer


Much has been written about the uniqueness of 2020 and all the changes and uncertainties that have come with it. What started as a localised and isolated health scare, very soon spread to a global pandemic. Despite fatality numbers being relatively modest as pandemics go, the uncertainty about the disease, and its transmission and propagation, caused an extreme leadership response.

Drastic mobility restrictions and a number of physical lockdowns led to economic outcomes not experienced in over a century. Countries, communities, and individuals faced circumstances that severely tested the fibre of our societies.

This process, however, is far from over. Now we have to focus on leadership because over the next few months, our futures will be determined by the decisions made by the people in power.

But before we look ahead, let’s reflect on how leadership decisions have impacted us recently:

  • Pandemic leadership:
    China was first to contract the virus; first to establish major city lockdowns; first to experience the economic fallout that follows such large-scale closures, and first to ‘recover’ as new cases and fatalities fell and economic recovery could commence.

    Many details of sector and industry dynamics in China now serves as the blueprint for the rest of the world as to what the short-term future probably looks like. Chinese mobility statistics show a return to pre-COVID levels in some industries, but a longer lag in others. This exact same pattern can be seen all around the globe, just with a lag of around 3 months.

  • Economic growth leadership:
    China has been the fastest growing of the largest global economies, and the major contributor to global growth, over the past 30 years. That pace of annual growth has slowly but surely declined from over 10% to around 5%. The world’s largest growth force has deflated and its relative lead over other developing economies has been neutralised.

  • Political leadership:
    Nothing empowers political leaders like a global threat, whatever form it might take. Armed with medical statistics and models predicting global doom, leaders all around the world took firm control of their constituents, rode rough-shod over otherwise democratic processes and implemented draconian containment strategies.

    In many instances these restrictions had dire social and economic consequences, but the leaders were emboldened by the forecast models. Borders were closed instantaneously, leaving many people, businesses and industries in perilous situations. With global supply chains broken, international trade collapsed, forcing local buying. This de-globalisation and regionalisation are the exact opposite of what we have seen in the last 30 years. It is one of the major themes that may impact our medium-term horizon.

  • Central bank leadership:
    Central banks, globally, had to step up to the plate to prevent systemic market and economic meltdowns. Interest rates were drastically lowered all around the world with many economies going into negative rate regimes, whilst many others are now at historically low official interest rates.

    Despite this very benign borrowing environment, economic growth remained sluggish. So central banks went further by monetising the enormous debt created by supportive fiscal stimulus. This new experiment in massive sovereign debt escalation, magically funded by central banks, is known as Modern Monetary Theory. It is another important theme on our dashboard.

  • Currency leadership:
    The US dollar has been the undisputed global currency leader during the past century. Not only has the United States (US) economy been the largest economy in the world during most of this period, it has also led most, if not all, multi-country global organisations. These factors have made the dollar a safe haven in its own right.

    This ability by the US to attract global savings has delivered them with a huge benefit via lower funding costs and ample liquidity. It also places the Federal Reserve and the monetary policy of the US on a global leadership pedestal. Hence the saying, “as the US goes, so goes the world”.

    This undisputed and ubiquitous status of the almighty dollar is now being eroded by the fact that the US interest rate differential has vanished, and their sovereign debt has increased way beyond the size of their economy. The future level and change in value of the US dollar against other global currencies remains one of the most important variables on our dashboard.

  • Industry and sector leadership:
    Lockdowns and mobility restrictions had severe impacts on many industries. The aviation, tourism, entertainment and hospitality sectors immediately come to mind as the worst hit by the pandemic restrictions. The automotive, manufacturing and energy sectors were also impacted, but theirs is more about postponement, as opposed to ‘never going to happen’.

    On the other side of the coin, the clear sector leadership that emerged was driven by the work-from-home (WFH) theme. Technology, communication and on-line retail – although present for some time and expected to take a while longer to develop – got fast-forwarded to the present. Suddenly everybody needed Zoom or Teams, and on-line retail became the norm rather than the exception.

  • Equity market leadership:
    Concentration in the US equity market has risen to historic levels as the technology sector went ‘through the roof’. The proportion of the total market represented by Apple, Alphabet, Google, Microsoft, Netflix and Amazon is astounding. Valuations of most of these stocks are reminiscent of the late 1990’s and we risk the creation of an over-valued tech bubble. Again though, we hear: “this time it is different”. It seldom is…

Now, as we look ahead to the last quarter of 2020 and further into the future, some other important leadership issues also come into focus:

  • US leadership:
    The US will go to the polls on 3 November, to elect their next President. Never before has the world been so ambivalent towards the two presidential candidates. Neither leader seems to inspire other global leaders to want to cooperate with the US on the global stage. The outcome of the US election has several possibilities:
    • A split House and Senate, as it currently is, ensures a good democratic balance, but also causes massive delays and complication to all decision making.
    • A red sweep, where President Trump retains the presidency and gets control over both the Senate and House of Representatives, is seen as very business and equity market friendly. It is however the worst-case scenario for US-China trade relations and hence global trade.
    • A blue wave by the Democrats, with a Biden presidency, and both houses of Congress, would be seen as constrictive for business on the back of higher proposed taxes on US corporates and breakup of large conglomerates. This scenario would however be deemed a much better outcome for US-China trade relations and global trade.

  • South African leadership:
    President Ramaphosa has faced an uphill battle since he took over the presidency in February 2018. He always has to manage the split objectives between business and society on the one hand and party-political interests on the other. Despite being seen as slow in his leadership style, he seems meticulous, and has thoughtfully unleashed the justice system onto corrupt practices. This cleansing is seen in a very positive light and is just what is needed right now as South Africa’s economy suffers very badly following one of the severest lockdowns in the world.

  • Global vs. local leadership:
    South Africa has suffered disproportionately from this COVID-19 global economic slowdown as we were already in a recession at the end of 2019. Due to severe fiscal constraints, very limited countercyclical government stimulus spending is possible. This leaves our fortune very much in the hands of the global recovery, driven by the leadership of the US and China.

    The leadership in the domestic equity market has been taken up by the resource stocks on the back of firm metal prices and a weak rand. Global leadership, however, has been with technology as mentioned earlier. The long-term opportunities now reside in financials and energy, but just like all value stocks, it might take a long time to catalyse.

The pandemic has fundamentally changed the world in many ways. Einstein said: “Logic will get you from A to B, but imagination will take you everywhere”. We’ll have to be very imaginative in our thinking and analysis to successfully plot our course, if we successfully want to navigate our investment strategy in the near to medium term.

I hope you enjoy this edition of the Citation.