2024: more of the same of 2023?

Will 2024 be more of the same of 2023 for investments with the same key themes of peak inflation, peak interest rates and the potential for a global recession, keeping in mind that 2023 was also positive for most asset classes which performed well?

Maarten Ackerman, chief economist and advisory partner at Citadel, says the short answer is that investors must adjust their outlook to take a more cautious approach in terms of where they invest in 2024. He believes that while the US avoided a recession in 2023, it was simply delayed.

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, Ackerman says.

“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.”

“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.”

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US economy will probably not have such a good year again

He says 2023 took us by surprise as markets underestimated the resilience of the US economy.

“During the Covid-19 pandemic, US stimulus provided a savings buffer for consumers to weather the high interest rates of 2023 but this is going to change in 2024 and the impact of higher interest rates will be felt.”

South Africa also faced a number of additional headwinds last year, including numerous structural issues, poorly performing state-owned enterprises, in particular Eskom and Transnet, as well as a slowdown in the global economy which meant reduced trade with its primary trading partners. Ackerman says this year is going to be much the same but with additional uncertainty around the upcoming national elections.

“Interestingly, on the investment front, in 2023 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.”

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 rand. Ackerman expects that cash and bonds will again offer inflation-beating returns in 2024, saying there are some good opportunities and given the current high interest rates, investors can now look at multiple asset classes for inflation beating returns.

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Cash is still king

“Cash is offering very attractive interest rates. In South Africa, investors can probably look at returns of around 9%, beating inflation. However, investors should 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.”

He says for offshore allocations, cash is giving attractive returns of about 4% to 5% in dollar terms, which we have not seen in a very long time.

Ackerman says local bonds are also offering attractive yields because the markets want 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.”

He adds that local and foreign equity markets are coming off a strong 2023-base and will be sensitive to the economic headwinds of 2024. “We believe equity will tread water for most of this year.

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Will 2024 see the magnificent seven continue with high returns?

“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) and here we talk about the magnificent seven companies: Apple, Microsoft, Alphabet (owner of Google), Amazon, Nvidia, Tesla and Meta.”

Ackerman says these companies were responsible for the majority of returns on the S&P 500 index last year. If these seven companies were excluded, equity performance for 2023 would look very different, he points out.

“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.”

When considering returns, he warns, 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.

Ackerman says the volatile rand will also offer 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 must correct key structural issues, which we do not think will happen until late 2024.”