Herman van Papendorp, Head of Investment Research & Asset Allocation and Sanisha Packirisamy, Economist at Momentum Investments
Momentum Investments have released their Financial market outlook for 2024: Rate reversal rejoice?
Below are the highlights with details in the downloadable PDF Report below.
Also below is the downloadable PDF version of the Economic Outlook: A retrospective look on 2023 and forward glimpses into 2024
Among the important financial market risks to monitor in 2024 are the likelihood of a United States (US) recession, the outcomes of myriad global elections (including in the US, South Africa (SA) and Taiwan), actual or potential military conflicts around the world, trade friction flare ups and renewed fragilities in China’s property sector.
The narrow-based advancement in the US equity market in 2023 prompts concerns about the sustainability of the upward trend into next year. Furthermore, uncertainties about geopolitics, US growth, inflation and policy rates are not reflected in low US equity volatility levels, potentially constraining future equity returns.
Historically, US bonds have had a consistently attractive return profile after the final US rate hike. Furthermore, yields across the maturity spectrum of the US yield curve are now higher than equity yields. This makes US fixed income a broader attractive asset class for investors in 2024, particularly for investors looking to move up the duration scale.
Indications of slowing US economic activity in 2024, with concomitant expectations at the time for the start of a US easing policy cycle subsequently, would provide some positive support to both the US bond and equity markets. We prefer US bonds to US equities until a falling rate cycle is discounted in 2024.
We are circumspect about global listed property due to the combined negative overhang of debt costs eventually resetting at higher interest rate levels and tight bank lending standards potentially squeezing funding availability.
A significant risk premium is embedded in rock-bottom SA equity valuations, with little positive sentiment towards the asset class. There is thus ample scope for a rerating should there be improvement in some of the local impediments over time, or if a global risk-on environment takes hold. SA equities are also very underowned by local and global portfolio managers, which implies that there is no overhang in the asset class, enhancing its rerating potential.
SA nominal bonds similarly discount lots of bad news. A break-even widening in the second half of 2024 in line with the projected inflation trend should provide more fundamental support for inflation-linked bonds (ILBs) as 2024 unfolds. We anticipate a need to increase SA fixed-income duration during 2024 to counter the rising reinvestment risk of shorter-duration fixed-income assets such as cash as we approach the start of the local rate cutting cycle.
SA listed property nominal and real dividend yields are among the highest in the world. However, the delayed impact of higher interest rates is already starting to hurt SA listed property companies, with further repricing to higher market rates in the offing as interest rate hedges expire and debt matures in the coming years.
Geopolitics and related central bank gold buying will likely remain dominant positive drivers for the gold price in the interim.
Download Financial market outlook for 2024: Rate reversal rejoice?
Download Economic Outlook: A retrospective look on 2023 and forward glimpses into 2024