Roné Swanepoel Head of Sales & Debra Slabber Director: Portfolio Specialist at Morningstar South Africa
Stock market forecasting should come with disclaimers like you would see in a pharmaceutical ad:
“Side effects may include being misled, misinformed, and create the potential for poor decision-making.”
2024 offers a clear example. Coming into the year most investors would have been underexposed to SA assets, specifically SA Inc, overweight offshore assets, being wary of their allocation to local bonds, or hiding in cash. That positioning would have been especially painful given how local assets performed. The returns below show that overly negative expectations contributed meaningfully to the market rally we saw last year.
- Local Equities +13.4%
- Local Bonds +17.2%
- Local Listed Property +28.9%
- Offshore equities (ZAR) +22.8%
- Cash +8.5%
In January last year, the average year-end S&P 500 target from 20 Wall Street strategists was 4,861, with the most optimistic forecast at 5,400. Where is the S&P now? At 6,062—12% higher than the most bullish estimate, 25% above the average, and 44% higher than the most bearish prediction.
Time and time again it’s been proven that forecasting adds very little value. Most market participants are always aiming to predict what is going to happen in the future – for example, a recession is coming in July, the market will crash in October, interest rates will fall and therefore bonds should perform well etc.
Investor expectations that consider a range of risk and return probabilities on the other hand is critical because it prevents us from being caught off guard. If I expect the market to fall by x% or more at some point then I won’t be surprised when it does eventually happen. If we don’t expect it, we don’t feel prepared, and that is more likely to cause panic. And no good investing behaviour has ever resulted from panic. Morgan Hounsel once said “An expectation is an acknowledgement of how things worked in the past and will likely work in the future. A forecast is strapping that idea to a specific point in time.” And that can be dangerous.
Reflecting on 2024
Looking back on 2024, a couple of key standouts were:
- Inflation globally appears to be under control, and we have seen central banks around the world, including South Africa, start to cut interest rates.
- Around half the world’s population who live in more than 70 countries held elections in 2024. This created uncertainty throughout global markets.
- Locally we saw the formation of the Government of National Unity. South Africa has entered a virtuous cycle, thanks to our government of national unity, and new hope sprung amongst investors post the election.
- Local was lekker”der” with South African assets faring much better than expected during 2024. This included not only local equity but also local bonds and property.
- The Rand was amongst the top-performing emerging market currencies, driven by rising foreign direct investment, lower inflation, and the potential for structural reforms.
- Donald Trump swept to victory in the US election, with his grip on power unified by Republican control of the Senate. There remains a lot of uncertainty and speculation regarding the impact this will have on markets, the fiscal debt pile, inflation, import tariffs, etc.
- US exceptionalism remained a dominant theme in 2024, both from an economic resilience as well as stock market performance perspective with the US market outperforming and concentration within the technology companies remained.
How are we positioned entering 2025?
There is no shortage of literature filled with forecasts this time of the year. At Morningstar, we tend to stay clear of trying to call markets or currencies higher or lower, especially on a short-term basis. Instead, we look at the opportunity set in front of us, how best we can position client portfolios to meet their needs and how we can protect our clients from the typical behavioural biases that are ever-present throughout their investing lifetime.
Looking at our current opportunity set, despite the stellar performance of local bonds recently, we continue to favour this asset class and hold a dedicated position across our local multi-asset portfolios. Local bonds continue to provide an attractive real yield, and we would consider this a fantastic opportunity for investors.
We continue to see good opportunities in local equities. It’s been incredibly tough to do business in South Africa over the past decade. Any South African focused business that has managed to survive has not only demonstrated resilience but also a business model that can be sustained in an environment of low growth and real headwinds. We have healthy exposure to South African equities through a combination of cheap passive broad market beta supplemented with active managers who can extract value from the smaller and less liquid parts of the market.
We took profits from our direct exposure to SA-listed property in 2024, due to the decline in the sector’s relative attractiveness.
Within our global equity exposure, we do acknowledge the richness of valuations in pockets of the market but remain optimistic about opportunities that are differentiated and far more attractive from a valuation perspective. The glimpse of a rotation that we witnessed in the second half of 2024 could continue but it is highly unlikely that it will be a linear path. Within the US, we do favour the more defensive parts of the market like US Healthcare and Consumer Staples.
We continue to hold direct emerging market equity exposure in our more aggressive portfolios, but we are mindful that the range of outcomes remains wide and that there could be large divergences between the performance of different emerging markets and have been mindful of our positioning.
What about the risk?
No different than any other year, we face many uncertainties and challenges ahead. There is (as always) a multitude of factors at play on a macro level, but also on a market level. Geopolitical risk will likely remain elevated in 2025, the Trump presidency should contribute to more market and macro uncertainty, dollar strength and the dislocations in currencies could persist, the rise in fiscal debt levels across the globe could continue to be a concern and concentration in specific high-valuation stocks remain. The list goes on.
The way we would think about managing risk and client expectations is simple, but not easy to do in practice. It comes down to a couple of key principles.
- Have a repeatable process in place and let that always be your true north.
- Pay attention to the client mandate and build a portfolio with an appreciation of the risk tolerance and timeframe of the client.
- Diversification. Diversification. Diversification (a cliché, but underappreciated).
- The price you pay for any asset class matters and will continue to matter over the long term.
- There is no free lunch. Be sceptical if something is positioned to you this way and it feels too good to be true.
Many investors are often guilty of overemphasising economic trends, market activity, and asset allocation themes when much of the “long-term investing magic” happens when a portfolio aligns with an individual’s unique needs. The start of the year is an ideal time to ensure that balance is in place.
In closing
Consider this: Nobody knows for certain what will happen next year. US stocks might rise, which most forecasts predict, and the historical evidence confirms that US stocks go up in nearly 75% of all years. But there’s also the possibility that stocks will go down.
A good investment process aims to keep investors in their seats regardless. One way to achieve this is by creating offsets in a portfolio to ensure no single event can deliver a knockout punch.
The future will always come enveloped in clouds of uncertainty—2025 will be no exception. Being dogmatic about predictions and focusing too much on the noise of market forecasters and media headlines likely won’t take you where you want to go. Instead, define your investment goals, invest along a time-horizon that fits those goals, and tie them into a disciplined process—this will likely be a much more effective path forward.
It also has the added benefit of not requiring a crystal ball.
ENDS
