Citadel Chief Economist and Advisory Partner, Maarten Ackerman unpacks the investment outlook for 2024.
As we enter 2024, we get a definite sense of déjà vu ― a feeling that this time last year, we spoke about the same key themes of peak inflation, peak interest rates and the potential for a global recession. We also predicted strong headwinds for risky assets, including the South African rand. As we start 2024, we can essentially copy and paste this outlook, with a few additional local and global risk factors in the mix – but there are still good investment opportunities to be had, according to Chief Economist and Advisory Partner at Citadel, Maarten Ackerman.
“Last year took us by surprise as markets underestimated the resilience of the United States (US) economy. During the COVID-19 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 while the US avoided a recession in 2023, it was simply delayed.
Ackerman notes that South Africa also faced a number of 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 which meant reduced trade with its primary trading partners. This year is going to 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 which performed well. South African equities and bonds recorded solid returns returning 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 a 8% boost on top of their returns when converted to rand.
2024 – CASH AND BONDS OFFER 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 like 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), here we talk about the magnificent seven companies: Apple, Microsoft, Alphabet (owner of Google), Amazon, Nvidia, Tesla and Meta. These companies 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.”
THE VOLATILE RAND OFFERS AN INVESTMENT OPPORTUNITY
“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.
2024 INVESTMENT SUMMARY
Ackerman concludes: “This year is going to be a challenging year from an economic point of view, and if investors want to get ahead in 2024, optimal portfolio construction is going to be crucial, for short- to medium-term investments. Being overweight in cash and bonds right now makes sense given current rates, while an underweight to equity with an allocation to defensive companies is warranted. Equity should remain part of your long-term investment portfolio. Considered investment decisions will ensure we are able to manage volatility in 2024.”