Adriaan Pask, Chief Investment Officer at PSG Wealth
While there’s good reason to believe this year will be better for South African investors than last year, one thing is certain – volatility will remain a constant with elections around the corner and escalating geopolitical events such as Yemeni attacks in the Red Sea and the war in Gaza.
The conflict in Gaza in particular has introduced a new layer of uncertainty in terms of the global economic prospects, and the knock-on impact on the oil price could pronounced.
These regional tensions and conflicts can escalate quite quickly for a wide array of reasons. This is something to keep in mind and prepare for from a portfolio construction point of view.
There are a lot of other moving parts to also consider in the months ahead. There are elections in South Africa coming up in May, and the US elections are coming up in November. There are also uncertainties about the timing and the scale of interest rate cuts, as well as questions about corporate profitability.
Looking at volatility, it’s intriguing that despite recession fears in 2023, volatility remained high but not exceptionally so. However, I anticipate that this year may bring increased market volatility, especially in currency markets.
Elections will play an important role from a volatility perspective. Essentially 70% of the global population will have the opportunity to go to the ballot boxes. The reason why markets are quite sensitive to elections relate to the potential change in policy or policy reform as leadership changes. These changes may involve monetary and fiscal policy that is a little bit looser or tighter, which would alter the economic outlook.
We saw US equity markets forge higher during 2023, primarily as a result of the performance of a handful of technology based stocks, the magnificent seven as they are now known. In our view, significant risks exist with these technology stocks, which are “priced for perfection”. The results that these companies are producing are very good, but even small misses against lofty market expectations lead to sell offs of these counters. This could add further volatility to the system.
We’ve come through probably the most aggressive interest-rate hike cycle in history, and it seems to have done the trick in reigning in inflation. However, interest rates are likely to come down slower than expected. Markets are thinking that the policymakers – especially in the US – want to protect the economy and will therefore cut quite aggressively. However, our view is that there is not too much scope to cut rates aggressively. Interest rates will come down, but not as sharply as some market participants are expecting at this stage. This could weigh on technology and growth stocks.
By the same token, counters and asset classes which have underperformed over the recent past could provide handsome returns as interest rates come down. Bonds and property for example do well in an environment where interest rates are declining.
It is important to remember that the outlook on inflation and interest rates is quite fluid and can change quickly. We anticipate that interest rates will decline in the second quarter of this year, which will help the macroeconomic environment as well as corporate profitability because costs—particularly finance costs—may decline. A more conducive tax regime following a change in leadership on the political side, could be quite supportive as well. All of this is obviously impacted by sentiment, which in the short term is a key driver of markets across the globe.
Close to home, 2024 is a hugely important election year. There’s a lot of political uncertainty in South Africa and the most likely outcome of the upcoming elections is for an ANC-led coalition. The extent of the malaise in our municipalities, SOE’s and overall government finances will have an impact at the polls. Not to mention the unemployment rate.
On the positive side, I believe we have seen the worst of load shedding, which has been a massive drag on economic growth, our currency, and the performance of the JSE.
As shown on many instances in the past, South Africans are resourceful. The private sector has made huge strides to become less reliant on Eskom through significant investment in renewable energy alternatives. We are also seeing a continuous stream of independent power producers (IPPs) come online – and the pipeline is still growing.
Looking ahead, our view is that investors will have to hang tight this year and stay the course. It’s a very good year to be positive – especially in South Africa. We’ll see rate cuts and we’ll see load shedding dissipating. So, ensure you that are diversified, can ride out volatility and be positive!
ENDS
