Sanisha Packirisamy, Economist at Momentum Investments

Momentum Investments released their Market and economic outlook – January 2024 , prepared by the Momentum Macro Research Team.

Highlights

Markets

• Uncertainties about geopolitics, United States (US) growth, inflation and policy rates are not reflected in the low volatility of US equity or its high valuations. This could potentially constrain 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, along with expectations for the start of a subsequent US easing policy cycle, would provide 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 South African (SA) equity valuations, with little positive sentiment towards this very underowned asset class by local and foreign fund managers. There is 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 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.

Economics 

• Investors, envisioning an escape from a deeper or more prolonged recession, may still grapple with a moderation in global economic activity in 2024. This is driven by the ongoing repercussions of tight monetary policies, constrained government coffers, lingering inflation and unpredictable geopolitical events.
• The underpinnings of economic growth resilience in 2023 seem fragile. High interest rates are likely to start biting and economic hardship could ensue if high rates persist.
• The world economy faces varied growth paths. While robust consumer spending in the US is expected to slow as excess savings dry up, Europe is contending with economic pressures and calls for fiscal austerity will likely limit recovery. On the other hand, China, is anticipated to benefit from meaningful policy announcements made late in 2023, following a disappointing response from authorities earlier last year.
• Despite global inflation having more than halved, the International Monetary Fund (IMF) warns that inflation in 90% of inflation-targeting countries will likely still exceed central bank targets in 2024.
• Calls for fiscal responsibility and more targeted fiscal frameworks are likely to sound louder to address pressures on debt sustainability.
• Elections in 2024 for over half of the world’s population will further contribute to an uncertain geopolitical landscape.
• The ruling party faces challenges ahead as we approach the 2024 SA elections given its inability to resolve shortcomings in energy and logistics, alongside insufficient progress made in curbing corruption. This raises prospects for coalitions at a provincial, and possibly even national, level.
• Escalating logistical challenges are affecting rail and port efficiency and dampening growth prospects in SA even as energy constraints are expected to ease.
• SA’s interest burden and social demands remain high, hindering a swift stabilisation in the country’s debt ratio.
• Though renewed risks to the SA inflation forecast exist, demand-led pressures and wage inflation are expected to remain contained.
• The SA Reserve Bank (SARB) is expected to continue talking tough on inflation even though the next move in interest rates is likely lower from here, most likely by the middle of 2024.

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