Maarten Ackerman, Chief Economist and Advisory Partner at Citadel

Following the recent announcements from the United States (US) Federal Reserve (Fed) and the South African Reserve Bank (SARB), Maarten Ackerman, Chief Economist at Citadel, reflects on the complexities both economies face as they navigate their respective challenges and opportunities.

US rate cut: bold but expected

“The Federal Reserve’s decision to cut rates by 50 basis points was bold but largely anticipated,” Ackerman explains. “Given recent economic data and communication by the Fed, it was clear that a rate cut was looming—the real debate was by how much and whether the markets could expect a 25 or 50 basis points. The larger cut was viewed positively by markets, with US equities rallying and the dollar weakening as a result.”

Ackerman notes that markets are now expecting further rate cuts, which could provide additional support for the US economy. “These cuts will likely sustain consumer confidence and help cushion the global economy against geopolitical risks and sluggish growth.”

SARB’S cautious approach: mixed reaction

For South Africa (SA), Ackerman comments, “The SARB’s decision to cut rates by 25 basis points was more cautious than expected, particularly since inflation is already within the target range. While some anticipated a more aggressive 50 basis point cut, the Reserve Bank opted for a measured approach due to SA’s unique economic challenges.”

He adds, “While the 25 basis point cut is a step in the right direction, SA’s economy requires further rate relief to stimulate growth and ease pressures on consumers. This decision followed an intense internal debate, with some members of the committee advocating for a half-point cut, while others argued to keep the rates unchanged.”

Investor sentiment and economic growth

Ackerman highlights that the recent cuts, although modest, should enhance investor sentiment, particularly towards SA equities. However, he emphasises that, “Interest rates alone will not drive significant foreign direct investment unless structural issues such as energy security, efficient logistics, and crime are adequately addressed.”

He continues, “To unlock SA’s economic potential, these long-standing challenges must be resolved. Lower rates can offer some stimulus, but without structural improvements, growth will remain constrained.”

Global monetary policy and SA’s position

“Globally, we’ve observed that central banks are beginning to ease monetary policy as inflation pressures subside,” Ackerman observes. “This easing should offer some support to global growth, indirectly benefiting SA. However, persistent global risks, such as trade tensions and China’s shifting role in manufacturing, will continue to impact global economic activities.”

Ackerman underscores the importance of accelerating structural reforms in SA, stating, “South Africa stands to benefit from global tailwinds, but unless local issues are addressed, the country’s growth potential will remain limited.”

Economic and investment strategy for 2024

Looking ahead, Ackerman sees both opportunities and risks for South Africa. “As we approach the final quarter of 2024, positive sentiment surrounding the Government of National Unity is driving strong performance in local asset classes, including bonds, equities, and the rand, which have outperformed many other emerging markets.”

However, he cautions that the upcoming Medium-Term Budget Policy Statement (MTBPS) presents a critical challenge. “Despite the optimism, fiscal issues like low tax revenue and high social spending continue to pose risks. The MTBPS will be a crucial test that could shift market sentiment.”

Ackerman advises investors to remain balanced in their strategies. “While there are buying opportunities in local and global markets, investors should remain cautious. Valuations are not cheap, and global economic growth is slowing. Fixed income is still an attractive option, offering strong real returns, while gold remains a valuable hedge against geopolitical uncertainty.”

Current real returns outperforming inflation

Ackerman highlights the exceptionally high real returns currently being experienced by some clients. At the moment, clients are experiencing exceptionally high real returns, significantly outperforming inflation. To provide context, over the long term, a typical cash investment might meet inflation or, after taxes, fall slightly below it. A bond investment would traditionally outperform inflation by about 1%, while a full equity portfolio might exceed inflation by around 6% to 7% over a three- to five-year investment horizon. However, right now, many multi-asset funds are beating inflation by between 8% and 10%.

This is an exceptionally strong real return compared to historical standards and is achieved at a much lower risk than being fully invested in equities. “Even in a high-inflation environment, investors able to enjoy these kinds of returns by sticking to a disciplined process and investment philosophy.”

Conclusion

Ackerman concludes by stressing the importance of reforms in driving sustainable growth in South Africa. “The recent US and SA interest rate decisions reflect broader global economic trends, but while rate cuts offer some support, the path forward remains uncertain. Locally, the focus must be on accelerating reforms to unlock long-term growth potential. Lower rates are helpful, but addressing structural issues will be key to improving the country’s economic outlook.”

ENDS