2nd Quarter 2024 Market Outlook

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Global equity markets have continued to soar since the end of last year, when it became certain that interest rates had peaked. The conundrum is that markets have ignored all possibilities that interest rates are likely to decline more slowly than expected. At the beginning of the year, the US market was pricing in six 0.25% interest rate cuts in 2024. Three months later, this expectation has been halved to three 0.25% interest rate cuts, as inflation has not declined as quickly as expected. Notwithstanding, offshore equity markets continued to roar ahead, led mainly by the US tech sector.

MSCI World Index (US $)

In South Africa, the JSE All Share Index is up only 2% over the last 12 months, as declining commodity prices and persistent international investment outflows have weighed down the market. However, despite many negatives, our stock market offers attractive value, which we believe should start to materialise after the May election, barring an unlikely ANC/EFF/MK coalition outcome.

JSE All Share Index

SA – It’s all about the election in May

Uncertainty surrounding the election outcome is weighing down local investment markets, evidenced by weakening government bonds, declining SA Inc. shares (mainly banks, retailers, property) and continued international investment outflows. Markets hate uncertainty and they often lean towards the negative, which we believe is being overdone and is therefore providing some attractive investment opportunities.

Latest Election Polls

The graph below shows the various election polls since 2022. Notably, they indicate that the ANC is unlike to receive the majority vote.

The average of these polls has the ANC receiving 45% of the vote, but latest polls are predicting around 40%.

It is highly likely that the ANC will lose its national majority, which was 46% in the 2021 municipal election, down from 58% in the 2019 national election.

With polls varying significantly for the ANC from 46% to 39%, its percentage vote is likely to determine with whom the ANC will partner in a coalition. The nature of the coalition will have varying outcomes for the future of the country and some meaningful effects on investment markets.  It will ultimately depend on what percentage of the vote the ANC receives.

Election Predictor and Market Forecasts

The table below sets out four probable election outcomes, each with very different market effects. Currently, investment markets appear to be taking a more pessimistic view assigning too high a probability to a disastrous ANC/EFF/MK outcome.

Outcome Probability Move in 2024
Estimated Investment Market View Investonline View SA Inc. * Shares Dollar/Rand
ANC Majority 5% 5% up 10% 18.0
ANC/EFF/MK coalition 25% 5% down 10% 25.0
ANC/IFP/Other coalition 60% 60% up 10% 18.0
ANC/DA coalition 10% 30% up 30% 16.5

*Banks, Retailers, Property, SA mid-cap Index.

We believe an ANC/EFF/MK coalition is highly unlikely and that a favourable ANC/DA coalition has a far higher chance of succeeding. This is not just wishful thinking.

The uncertainty and more pessimistic view that markets are currently adopting provide an appealing investment opportunity in SA local shares (SA Inc.). We believe that after the election, and once coalitions are finalised within the month following, uncertainties will be removed and markets should react positively, barring an unlikely ANC/EFF/MK coalition.

Fears of an ANC /EFF/MK coalition are real, but with Ramaphosa at the helm, it appears highly unlikely. The lower the ANC percentage vote, the better, in our opinion, which could force a DA coalition, resulting in the most market friendly outcome. This is despite the DA dismissing any chance of an ANC/DA coalition.

SA shares are attractive

The South African equity market offers attractive value, and we believe it should produce good returns after the election, barring an unlikely negative outcome of an ANC majority or ANC/EFF/MK coalition.

The local stock market’s forward P/E of 9.2 is near a 30-year low, and this is despite the interest rate cycle peaking, which should drive higher valuations, as is occurring in offshore markets.

The Rand’s direction depends on the election outcome

Excluding an ANC majority or ANC/EFF/MK coalition, both of which appear highly unlikely, we believe that the Rand/Dollar is likely to strengthen slightly after the election, as the negativity associated with an uncertain outcome is removed.

Our Rand/Dollar fair value is 18, which includes a 25% risk premium above purchasing power parity of 14.4, due to SA’s weak economic outlook, rising debt and dysfunctional ANC government.

The markets’ biggest fear – Government debt spiral

Notwithstanding the election outcome uncertainty, the market has renewed fears of a government debt spiral. This is a consequence of far lower revenue collections (as commodity prices have declined) and government’s inability to stick to their stricter expenditure budgets.

The graph below outlines government’s debt forecasts and Coronation’s far higher forecasts, with which we agree, and see as a major long-term risk to the country’s economy and ultimately local investment markets.

Currently these higher government debt forecasts are being reflected in lower SA bond and local SA share prices and a weaker Rand.

Global equity performance is skewed

Over the last three years, the US (S&P 500) has returned an average 10% per annum, mostly driven by the IT sector, which we believe is overvalued. But other major developed market returns from Europe, UK and Japan have been flat. And Emerging Markets are down an average 4.5% per annum, mostly driven by an average 16% per annum decline in Chinese equities.

Global equities (ex the US) are attractive

The significant outperformance from the US over the last three years is reflected in the widening valuation gap shown in the price:earnings (P/E) ratio chart below. The widening valuation gap has been fuelled by abnormally high US central bank stimulus injected into the US economy during Covid. Now the indirect withdrawal of this stimulus with higher interest rates remains a risk to US markets.

Excluding the USA, the global forward price:earnings (P/E) ratio is 13.7, below its 20 year average. This is attractive as global interest rates have peaked, which should be positive for equity markets.

World equity forward P/E ratios

Inflation and interest rates are still the main driver of markets

Although markets are convinced that interest rates have peaked, which is being reflected in soaring global equity markets, the conundrum is how long it will take for interest rates to decline to historical averages, which will boost economic growth.

At the beginning of the year, the US market was pricing six 0.25% cuts in 2024. Three months later, this expectation has halved to three 0.25% cuts, due to inflation not declining as quickly as expected. Inflation remaining higher longer than expected, is a risk to global markets, as interest rates will not decline quickly and the likeliness of an economic recession increases.

Currently global markets, and mostly the US, are pricing in a sharp decline in interest rates in 2025.

Global developed country inflation

The US election’s positive market effect

The graph below shows the strong market performance in years of a presidential re-election. The reason for this is that economic incentives are boosted in these years to garner more support.

Although a Trump/Biden rematch may be entertaining, we believe the outcome is unlikely to have a material effect on investment markets, as it should be a close race and a near evenly split congress/senate will restrict any radical changes from taking place.

US/China relations are an economic and geopolitical risk

Although the protracted Ukraine and Israeli wars are prompting global dissention, we believe the biggest investment related concern is the continued friction in US and China relations. Both countries are aware that they need each other, but a continuing uncooperative working relationship is a risk to overall global economic growth.

Investonline’s in-house Prosperity Fund continues with effective, stable returns

The Prosperity Worldwide Flexible Fund of Funds, managed by Investonline Director, Nick Brummer, is a conservative fund with an emphasis on capital preservation. Over the last two challenging market years, the fund has returned an average 12.7% p.a. (net of fees). Since inception (9.5 years) the fund has returned an average 9% p.a. (net of fees).The fund is well suited to investors who want offshore exposure and a steady investment return.

Investment markets offer pockets of value

On balance, global markets are attractive as interest rates have peaked, and valuations (excluding the US tech sector) are undemanding. We prefer cheaper markets, such as the UK, Europe, Emerging Markets and especially South Africa.

Review your Investment Strategy

With widening global investment valuations, ensure that your investment portfolio is properly balanced and adjusted to suit your personal risk profile to achieve your goals. Check that your financial plan is up to date. It is critical to ensure that the risk you take in your investment portfolio matches your financial plan, especially when nearing or during retirement.

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