CIO at PSG Wealth, Adriaan Pask, explores how 2024’s market milestones are likely to impact the year ahead for investors 2024 has been quite a year. Election years are typically quieter, with market activity slowing ahead of the vote. Since elections often take place late in the year, the shortened window for confident trading and investment usually results in subdued overall activity.
But 2024 has been an outlier, marking the best election year for the S&P 500 since the 1930s with the index up 25% for the year so far. This performance is particularly striking given the elevated valuations in certain securities and market segments, which made such a strong rally and sustained momentum seem unlikely.
Asian markets have also been remarkably dynamic, with fresh developments from China emerging almost weekly. Equally notable were the events in Japan this August, where turbulence in the carry trade sparked significant market shifts. Domestically, we anticipated a balanced election outcome, but the formation of a Government of National Unity (GNU), with multiple parties driving reform, was a major surprise. Even more unexpected was the smooth aftermath — no social unrest, no significant issues and strong approval from international investors.
Against this backdrop, the most uncomfortable investment decisions often prove to be the most rewarding. Acting on research and investing in out-of-favour areas requires courage but can yield significant returns. South African assets exemplify this principle, offering compelling opportunities despite current market sentiment.
We assessed the risks, potential consequences, and probabilities of various outcomes, concluding that markets were likely overpricing bad news. In the end, not only was there no bad news, but there was also considerable good news.
This highlights two key lessons: first, the importance of following the research, and second, the value of diversification.
South African assets have shown strong performance across the board. Equities have delivered solid returns, while bond yields have declined in line with the long bond. Listed property companies, though slow to recover from post-COVID losses, have also performed well. Similarly, our banks and local retailers have shown strong performance.
Global government debt, the risk of inflation and excessive asset valuations will be challenges going forward. US government debt levels have created a headwind by borrowing heavily against future growth. Taking on debt is essentially a bet that growth will outpace the rise in debt costs. If that growth fails to materialise, escalating debt and funding costs can become a significant burden.
Persistent inflation also raises concerns, particularly regarding its long-term impact on US government financing costs. With interest rates remaining elevated, the government’s annual interest bill on bond issuance now exceeds $1 trillion. This burden falls on taxpayers, diverting funds from productive economic investments that could drive growth.
Valuation risk in the US has been a concern for some time, even as the market continues to surge, seemingly detached from fundamentals. The reality is that current market behaviour shows clear signs of excessive speculation. Retail investors and speculators are driving activity, with obscure cryptocurrencies skyrocketing and leveraged ETFs on unconventional assets being launched. This abundance of speculative capital suggests too much money is circulating, creating conditions that often precede trouble.
Many private equity firms, flush with capital, now face significant reinvestment risk. As their earlier investments mature, they are pressured to deploy capital, often into lower-quality opportunities with near-term challenges. This cycle of forced reinvestment into suboptimal assets is a key concern moving forward.
We see South African equities as a broad area of opportunity. Currently, share prices are catching up to earnings after prolonged pressure, particularly within the banking sector, though not universally. Even the bond market offers potential, with room for yields to decline further. Much will depend on the upcoming National Budget Speech in February, and we remain hopeful it avoids any shocks that could unsettle rating agencies.
We’re not broadly negative on the offshore environment but remain focused on the US. While China offers significant opportunities, it’s crucial to weigh the risk-adjusted returns in that market. The UK, however, stands out as an overlooked space. Like South Africa, retail investors have shifted capital toward the US, chasing its recent returns. As the cycle turns and investors reassess valuations more rationally, we expect some of that capital to flow back, unlocking potential opportunities in the UK market.
While some risks remain, they’ve clearly decelerated, significantly reducing the probability of a negative outcome. From a risk perspective, conditions have improved substantially, and from a return perspective, there’s still a meaningful upside. Overall, we’re in a much better position, which is encouraging. Having said this, the South African market is the most exciting part of the portfolio right now.
Saturday Star