Local assets offer short-term gain, but longer-term pain

US and SA elections as well as rising geopolitical tensions are presenting increasing investment risk moving into 2024.

On the flip side, local assets could deliver strong real returns next year, as SA is expected to enjoy some interest rate relief and improvement in energy availability but, longer term, local assets are a value trap.

Examining key themes influencing the markets

Looking ahead, Old Mutual Investment Group (OMIG) has identified four key themes that will drive investment decisions in 2024.

The first theme, called “global cycle down”, holds the view of an imminent US and EU recession. The lagged impact of global rate hikes is still expected to trigger a recession in both these regions, as the full impact of restrictive monetary policy has not yet been seen.

OMIG has therefore positioned its portfolios accordingly. The key implication is that this environment is going to be bad for risk assets and cash and bonds are therefore preferred over equity, and cheap defensives over quality stocks.

Locally, 2024 will likely see better growth, but the trend will be anaemic. This is summed up under the theme of “SA: a long-term loser”, which is driven by expectations of low growth, failed state-owned enterprises, political uncertainty and a general lack of reform implementation. While next year is looking like it could yield better local returns thanks to interest rate relief and better energy availability, over the longer term, SA assets are ultimately seen as a value trap.

“Peak rates” — another key theme for 2024 — is based on the belief that short rates have peaked globally. With cyclically lower inflation and weaker growth, central banks can pause, with cuts to follow. It's expected that global rates will start coming down towards the second half of next year, with local rates following suit. Against this backdrop, SA bonds, global bonds and cheap equity with rerating potential are preferred. 

With constantly evolving geopolitics and a deglobalisation trend taking front and centre in 2023, the fourth and final theme that will influence investment decisions next year is a “a new world order”, driven by a secular change in the global landscape.

US recession inevitable

While the US consumer has been surprisingly resilient in 2023 and provided GDP growth with a positive one-off shock, these tailwinds should fade in 2024 and the inverted yield curve still suggests a high risk of recession.

Given current inflation still being too high and an understaffed labour market, the Fed will need to maintain a tightening bias. This approach, combined with concerns about tightening credit by US banks, increasing delinquencies and depleting consumer cash levels, is likely to affect the resilient growth seen to date.

With a US election on the horizon, a recession would undoubtedly be damaging for President Joe Biden’s re-election hopes. But on the other side of the coin, contender Donald Trump is facing multiple legal challenges.

South African investors need to watch the policy implications. Historically, a larger deficit at the start of a presidential term leads to some fiscal restraint. However, it's highly unlikely that either of these two candidates are likely to tap the brakes on spending from 2025, so there is not much hope of an improving US fiscal situation.

Short-term gain, long-term pain for local assets

Looking at local assets, a cyclical improvement in the energy crisis and interest rate relief will drive stronger real returns in SA next year.

It's most likely that 2023 was the peak of the energy crisis, with increased capacity coming back online in 2024, as power plants such as Kusile and Koeberg come back into service. This, together with a groundswell in renewables and private generation, should bring us back down to a happy medium of stage 1 load-shedding in 2025.

With regard to interest rate relief, while all of the last three Monetary Policy Committee (MPC) meetings have held rates on hold, the last meeting was the first one where the decision was unanimous, indicating a stronger leaning more towards cuts as the next move. In addition, the upcoming petrol price cuts will give the MPC more room to ease monetary conditions next year.

There is also the significant issue of the SA elections, which are expected to take place in the first quarter of 2024, to consider. The polls are showing ANC voters sitting at just under 50%. OMIG’s position is that this outcome is likely, and the ANC will need to form a coalition with a smaller party. The two market shock results to watch out for, however, will be an ANC/EFF coalition and an ANC/DA coalition.

Cyclically, local assets could have a good 2024, but the outlook on local markets is still negative given the secular risks facing the economy. It's believed that they will offer a value trap over the longer term.

Unless the government can lift long-term potential growth via growth-enhancing reforms and resolve the long-term fiscal risks, local assets will not be an investment destination of choice outside a cyclical commodity upswing. They will remain appearing as compelling value with no catalyst to unlock that value.

• About the author: Jason Swartz is a portfolio manager at Old Mutual Investment Group.

This article was sponsored by Old Mutual Investment Group.