Chief economist and advisory partner at Citadel, Maarten Ackerman, says there is a definite sense of déjà vu going into 2024, with the same key themes of peak inflation, peak interest rates and the potential for a global recession that we saw going into 2023.

“Last year took us by surprise as markets underestimated the resilience of the US economy. During the pandemic, US stimulus provided consumers with a savings buffer to weather the high interest rates of 2023. This, however, is going to change in 2024 and the impact of higher interest rates is going to be felt,” says Ackerman.

He believes that although the US avoided a recession in 2023, it was simply delayed.

Ackerman notes that South Africa also faced several additional headwinds last year, including numerous structural issues, poorly performing state-owned enterprises ― Eskom and Transnet, in particular – and a slowdown in the global economy that meant reduced trade with its primary trading partners.

He expects this year will be much the same but with additional uncertainty around the upcoming local elections.

“Interestingly, on the investment front, 2023 proved to be positive for most asset classes. South African equities and bonds recorded solid returns of around 10% each for the year.

“Offshore markets were even more robust. We saw strong double-digit returns from most global equity markets (with the MSCI AC World Index up more than 20%) and gold also printed solid returns,” says Ackerman.

Adding to investor windfalls, with the rand slipping more than 8% against the dollar, any dollar-exposed portfolios received an 8% boost on top of their returns when converted to the rand.

Inflation-beating returns

According to Ackerman, investors need to adjust their outlook to take a more cautious approach in terms of where they invest this year.

There are, however, some good opportunities and, given the current high interest rates, investors can now look at multiple asset classes for inflation-beating returns.

“Cash is currently offering very attractive interest rates. In South Africa, investors can probably look at returns of around 9%, beating inflation. Investors should, however, consider the tax implications and that a bigger allocation of cash makes more sense in tax-friendly products such as retirement annuities and tax-free savings accounts.

“For offshore allocations, cash is currently giving attractive returns of around 4% to 5% in dollar terms, which we haven’t seen in a very long time,” says Ackerman.

Ackerman notes that local bonds are also offering attractive yields because the markets are looking to be compensated for the implied risk of investing in South Africa, given the challenging fiscal environment.

In this space, investors could get good inflation-beating returns from the local bond market in 2024.

In the offshore bond space, if one looks at 10-year US Treasury yields, investments can yield returns of between 4% and 5%. These returns can easily turn into double digits on the back of capital gains if the US start to cut interest rates.

Ackerman further notes that equity markets, both locally and abroad, are coming off a strong 2023 base and will be sensitive to the economic headwinds of 2024.

“We believe that equity will tread water for most of this year. Equity should form part of an investor’s long-term strategy, with a weighting to defensive companies. We must also remember that a lot of the returns seen in 2023 were driven by the theme of artificial intelligence (AI).

“Apple, Microsoft, Alphabet (owner of Google), Amazon, Nvidia, Tesla and Meta were responsible for the majority of returns we have seen on the S&P 500 index last year. If these seven companies were excluded, equity performance for 2023 would look very different.

“We believe the momentum of the AI theme is going to soften in 2024, removing the tailwinds that it offered. We are anticipating low single-digit returns from both the local and global equity markets this year,” says Ackerman.

“When considering returns, investors must factor in the tax implications of their investments as this could nullify some of their gains. Multi-asset funds, as well as tax-free savings and investment accounts, will protect investors from any immediate tax obligations.”

Opportunity in the volatile rand

“In 2024, we expect the rand to remain under pressure, which implies that offshore investments will get the benefit of the weaker currency.

“Our medium-term view for the rand is that it will fluctuate between R18.50/$ and R20.50/$ with a lot of volatility. It may even go north of R20.50/$ if the global risk-off environment gains traction during the first half of 2024.

“For the rand to strengthen, South Africa needs to correct key structural issues, which we do not think will happen until late 2024,” he says.

Deglobalisation, decarbonisation and demographics

Investment experts at Schroders believe the mega-themes reshaping the world economy (deglobalisation, decarbonisation and demographics) provide a wealth of opportunities and risks for global investors in equities.

Alex Tedder, head of global and thematic equities at Schroders, says beneath the surface of some respectable returns for global equities in 2023 – with the MSCI World so far up 9.1% in USD terms – the picture is anything but benign.

“As always, however, the adage that ‘there is always a bull market somewhere’ may prove accurate. We think several areas may prove highly profitable for global equity investors next year,” Tedder says.

The most obvious implication of the 3D Reset is that cash is no longer trash: Tedder says money in the bank can get you respectable returns. However, he notes that equity investors need a change in mindset, which will mean:

• More diversification across regions (less US and more of the rest of the world);
• More focus on the implications of structural change, and
• Renewed attention to valuation, quality and risk.

“As Warren Buffett regularly reminds us, it’s tough to bet against the S&P 500,” Tedder says.

Since the end of 2010, the S&P has delivered, in US dollar terms, a cumulative return of 340% compared to 95% for European equities and just 20% from emerging markets.

China has delivered a negative return over that period.

High-growth areas such as technology, communications or healthcare account for a far higher proportion of the index than in other regions.

The IT sector, for example, now accounts for 28% of the S&P 500, compared with just 6% in Europe.

“Based on these factors, it is likely that the S&P will continue to trade at a premium to other markets. However, it is notable that the valuation gap between the US and the rest of the world is now at extreme levels.

“To put this into context, the market capitalisation of the super-seven group… (responsible for most of the return from global equities this year) is now greater than that of the UK, France, China and Japan combined.

“Historically, while such polarisation has often persisted for long periods, inevitably at some point the gap closes,” he says.

Valuations are about more than cheap stocks

Tedder cautions that, in a higher interest rate environment, valuations matter much more than when interest rates are close to zero.

“By this, we do not simply mean companies that are cheap. Cheap stocks are usually cheap for a reason. Companies in traditional sectors such as energy, financials or industrials are not only highly cyclical but also face major disruption from the transition to new technologies.

“In contrast, a company trading expensively on current metrics may turn out to be anything but, if it delivers sustained growth and cash flows in the future,” he explains.

“We think it will pay investors to focus on the longer-term, identify the areas with structural, under-appreciated growth and commit strongly to those companies with sustained competitive advantage.

“Like anything, the price you pay for a security is the price you pay. Value is what you get. There is plenty of value in global equity markets, especially for the patient investor,” Tedder notes. DM