Cautiously Optimistic about 2024

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By Brian Butchart *

South African investors have a lot to process in 2024. National elections, for one, will dominate the agenda and set the tone for how local and international investors respond. There can be no denying that we’re in desperate need of a positive outcome to rekindle an economy that’s been underperforming for far too long.

Further afield, the global economy is finding its feet again after COVID slowed output and growth. Which is very encouraging if you consider that global geopolitical tensions have entire regions on edge.

Geopolitical risk remains high, Russia/Ukraine, Israel/Palestine and China/Taiwan to name a few with multiple elections globally in 2024 could change any forecast.

This picture of an imperfect world is one that investors have had to muddle through for generations. And, somehow, despite uncertainty and volatility, we’ve always managed to adapt and make the most of the hand we’re dealt.

Forecasts are always at risk of being wrong, but despite the turmoil and uncertainty we remain cautiously optimistic and here’s why:

A recovering global economy

The COVID pandemic disrupted the global economy in more ways than just GDP growth. As we’re all painfully aware, effects from the pandemic also fuelled inflation to record levels, especially in economies like the US, UK and Eurozone that for a long time experienced relatively low inflation.

As a result, central banks started raising rates with the US Fed raising interest rates 11 times since March 2022 – the fastest pace of tightening since the early nineteen eighties in a bid to stifle inflation. This policy worked, but only after nearly two years of regular interest rate increases. Debt has therefore become more expensive, choking household spending, and leading to lacklustre revenue for listed consumer brands.

The halting of interest rate increases late last year is seen as a turning point in this cycle, with markets mainly responding positively. I say ‘mainly’ because markets remain extremely volatile, with limited sectors, like tech, performing much stronger than others. The Magnificent 7 dominated US markets in 2023, together with selective markets in Europe as well as Japan. The neglected broader US market and other global markets remain attractively priced to offer opportunities to investors seeking higher yield as interest rates start to decline.

So, although inflation has been calmed, central banks remain wary of underlying weaknesses that could keep rates higher for longer. On the plus side, it appears a feared recession in the US may be moderate or averted although that threat hasn’t completely disappeared.

When the US sneezes …

Investors globally have come to accept that the state of the US economy often dictates the fate of their portfolio’s performance.

That still holds true today given the size of their economy and influence of their markets. The fortunes of US markets are of special interest to South African investors who have exposure to the US dollar and markets.

Looking to key indicators in the US, consumers have been surprisingly resilient as many have retained their pandemic-era savings. Households are also displaying significant wealth and liquidity, as measured by record inflows into money market mutual funds. There is currently more than $5 trillion USD currently invested in US money market deposits. We expect at least a portion of this will find its way back to equity and bond markets in search of higher yields as interest rates decline and money markets become less attractive which should continue to drive markets higher.

On top of this, the job market has remained surprisingly robust, with millions of openings indicating a strong economy. However, this also brings challenges, such as potential wage inflation, which could contribute to higher inflation for longer.

Other factors that count in the country’s favour include the focus on re-establishing US manufacturing capabilities, with government incentives like the CHIPS and Science Act driving this new wave of domestic investment.

So, on the whole, the US economy appears to be emerging strongly from the pandemic, which should give investors confidence to back US-listed stocks.

The flip side of the coin

While the US is showing signs of long-term recovery, South Africa appears to be on an opposite trajectory.

One of the more alarming signs confirming this slide in confidence is the accelerated pace at which foreigners are pulling their funds from the country. In the last week of December 2023, foreign investors sold a net R400 million worth of domestic shares, contributing to a total net sale of R145 billion and R326 billion of domestic bonds in 2023.

Sadly, this is not a new trend. Over the past five years, there has been a consistent pattern of net selling by foreign investors. However, the pace accelerated in the last year, particularly as the electricity crisis deepened, casting a shadow over the prospects for the local economy. A net, eye watering R1.5 trillion in local bonds and equities was sold by foreigners over the last 5 years.

With national elections coming up in a few months, the continuing power outages and confidence in state-owned enterprises at an all-time low, it’s difficult to feel positive about the outcomes. The flight of foreign capital is hopefully not a harbinger of more bad tidings to come.

A turnaround in the country’s fortunes in the short term seem unlikely, which is why we’ve been advising investors to reduce their exposure to South Africa. The economy is simply not delivering the growth needed to secure a comfortable retirement and is unlikely to do so in the near future.

Protecting your retirement savings means that they have to grow at a rate faster than inflation, and the best way we see to do that is to invest in growth assets that also offer currency diversification.

Offshore assets, therefore, need to be a central theme for South African investors hoping to beat the country’s economic slump.

And that is probably the biggest reason to be optimistic about 2024: the country’s fate doesn’t have to hang around our necks like a millstone. You have options aplenty in international markets, and your ability to take advantage of this opportunity with a well-constructed portfolio can help provide better long-term outcomes.

* Brian Butchart, CFP® is the Managing Director of Brenthurst Wealth [email protected]

Brenthurst Wealth Management