Sanlam Investments 2024 market insights: navigating economic shifts and investment opportunities across asset classes

Sanlam Investments’ economist as well as equities, fixed interest and property teams unpack their outlook for 2024 and explore broad trends in the financial markets.

As we are well into the first quarter of 2024, investors are hoping for a shift in global central banks recent years of consistent interest rate hikes. While it is crucial to acknowledge the many lingering risks, this could usher in a more favourable environment for different asset classes later in the year.

The Sanlam Investments team, comprising of seasoned professionals, has considered market dynamics, offering informed predictions for 2024.

Explore our insights on the expected outlook for broader asset classes by clicking on the links below:

• Economic outlook – Arthur Kamp
• Domestic equity outlook – Andrew Kingston
• Domestic bond outlook – Mokgatla Madisha
• Domestic listed property – Mvula Seroto
• Global developed market equity outlook – Pieter Fourie
• Global emerging market equity outlook – Feroz Basa
• Global developed market bonds – Thomas Wells
• Global listed property – Theodore Freysen

Economic outlook – Arthur Kamp

In 2024, we anticipate a marked shift in the investment landscape. The US Federal Reserve is poised to cut interest rates as the world’s largest economy finally succumbs to tight restrictive monetary policy in addition to further disinflation. This action is expected to ease global financial conditions, with favourable implications for emerging market currencies and interest rates in general.

Global GDP is expected to advance at a moderate pace, providing a less-than-ideal backdrop for SA’s growth outlook. However, we continue to expect a significant improvement in electricity supply in the year ahead, which would enhance domestic GDP growth for 2024. Despite this optimism, SA may face economic constraints, including a low domestic savings rate amid insufficient foreign capital inflows and logistical challenges, which will restrict a robust rebound in activity. Sub-par economic growth, in turn, maintains pressure on sources of government revenue and fiscal sustainability, limiting National Treasury’s capacity to sustain critical socio-economic expenditure, while increasing the risk of tax increases.

Given current shocks, we believe the rand is trading at its justified value. However, the depreciated rand may respond positively to US interest rate cuts and significantly lower levels of load shedding. The expected resumption of disinflation, following a temporary increase in annual headline CPI late in 2023, should prompt the South African Reserve Bank to cut its repo rate. The timing of this decision is likely to hinge on the US interest rate-cutting cycle.

This implies that domestic interest rate cuts may be delayed until the second half of 2024, given the US Federal Open Market Committee’s reluctance to declare premature victory over inflation. US core inflation has been sticky relative to headline inflation, reflecting a tight labour market and arguably loose US fiscal policy.

History has taught us how unpredictable the future is. In recent years, unexpected turns have derailed forecasts, underlining the importance of identifying and assessing the impact of those emerging themes that are likely to endure.

Among these a nascent shift away from global economic integration towards geo-political and geo-economic fragmentation stands out as particularly important. The number of global trade restrictions is rising, while strategic investments have been redirected from some emerging markets back to the US. If this translates into lower investment flows into emerging markets more broadly, then capital-scarce economies such as SA and its currency are at risk. Simultaneously, rolling back the gains from global economic integration implies lower real GDP growth and higher inflation than would otherwise have been the case.

Domestic equity outlook – Andrew Kingston

At the outset of 2024, we‘re mindful of the various challenges faced both in SA and globally, making short-term investing a daunting task. Despite the immediate difficulties, our focus remains on the long term, as we anticipate the impact of these challenges will gradually diminish. However, we acknowledge persistent issues such as escalating geopolitical tensions, heightened trade disruptions, ongoing wars with no apparent resolution and other uncertainties.

Drawing insights from international markets, we expect 2024 to be another turbulent year. Successive increases in interest rates, both globally and domestically, are inevitably expected to moderate economic growth and influence company prospects. Many of these expectations appear to have already been factored into the market, presenting opportunities to identify quality companies in SA that are trading at attractive prices from a long-term perspective.

Challenges like the disruptive electricity supply could have been better managed – but we could see an improved domestic economic performance building on the weak base established in 2023. Structural and fiscal challenges, as well as the inevitable anticipated disruptions from the upcoming 2024 national election, keep us cautious. On balance, we are more constructive on the overall domestic outlook going into next year. We see great value now and remind investors to adopt a long-term perspective.

Domestic bonds – Mokgatla Madisha

South African bond investors, like their global counterparts, endured a volatile performance in 2023. In 2024, markets are forecasting a rebound in emerging market assets, again predicated on a weaker US dollar.

In 2023, apart from the “Lady R” induced sell-off, when investors feared SA could be hit by sanctions if it was proven to be selling arms to Russia (although there was a recovery in June), yields on South African bonds were highly correlated to US bonds as global monetary policy drove asset performance. Yield curves in the US, Europe and domestically are pricing in cuts in policy rates, of about 125 bps over the next 12 months, and a reduction in short-term rates will support a better bond market performance. We expect that in 2024 global growth will moderate but not materialise into a full-blown recession. A severe slowdown would be negative for SA and broader emerging markets.

Our strongest conviction call for 2023 was that cash would provide the best risk-adjusted returns of all fixed-interest assets. For the year 2023, the cash index, Stefi, has delivered 8.06% while the All Bond Index has returned 9.70%. For 2024, we think nominal bonds will outperform cash and inflation-linked bonds meaningfully. Among nominal bonds, we like front-end and intermediate bonds which will benefit from easing monetary policy. The back end of the yield curve has underperformed significantly over the past year, but we are not yet convinced that it represents the best value. Treasury’s funding strategy will be critical to whether the curve will flatten or not.

What could upset the apple cart? Risks to the local market stem from elections, which are expected to take place around May 2024. The ANC is expected to see a drop in support and the market will be cautious ahead of the polls. The market believes that the recently-passed National Health Insurance Bill is unaffordable. If the president signs it into law, the market will fret about how it will be funded, and I believe a higher risk premium at the long end of the curve will be warranted.

Domestic listed property – Mvula Seroto

Recently reported results from property companies have been mixed, with the surprises largely driven by economic factors such as increased funding costs and constrained liquidity, rather than property fundamentals. While the South African real estate landscape remains challenging, vacancies across subsectors appear to have stabilised, reversions continued to improve on average and valuation write-downs bottomed, as the negative impact of rising bond yields was partly offset by an increase in net operating incomes. Despite inflationary rental escalations in the retail sector, trading density growth has been strong and overall healthy occupancy cost ratios have been reported.

Recent results give cause for optimism that the South African property cycle has bottomed out and 2024 could be the turning point if interest rates begin to ease. Increased funding costs have detracted from earnings during the prior reporting period and the negative impact is expected to moderate in future. Maturing interest rate swaps are likely to reprice higher, implying a headwind for earnings growth in the short term, but we believe the increase in interest costs is already priced into earnings expectations.

Our rolled one-year funds available for distribution (FAD) yield is circa 10%, with single-digit growth in distributions forecast in the short to medium term. The sector continues to trade at a significant discount to NAV, and a material dispersion still exists between SA-centric companies at a discount to NAV of 40% and offshore companies trading at a discount of 20%. Although the uncertain macro environment is likely to continue to drive elevated volatility in asset prices locally and abroad in the short term, we currently expect total returns of between 12% – 15% per annum over the long term. We prefer defensively positioned companies in the retail and alternatives (residential & storage) subsectors, with a preference for Central Eastern Europe over Western Europe across our portfolios.

Global listed property – Theodore Freysen

The global listed real estate market has weathered two years of relentless pressure induced by aggressive monetary tightening, resulting in an increase in benchmark interest rates, the largest in any two-year period since the early 80s. This has led to a derating in the valuations of rate-sensitive assets, including real estate. Returns from the listed sector have been disappointing over this period, but it is vital to note that the valuation pressure is primarily interest-rate-driven, with property-level fundamentals remaining robust across most sectors. While public real estate valuations have adjusted, private real estate is expected to face further declines in the coming year. As the worst of pandemic-era inflationary pressures subsides, a glimmer of hope emerges for the listed sector.

Despite a slowdown in economic growth, the operating fundamentals of real estate, although decelerating, continue to be robust. As real estate is a localised investment, fundamentals vary greatly by geography and subsector. Some of the subsectors that are experiencing favourable supply and demand dynamics include data centres, logistics warehouses, senior housing, and single-family housing. At the other end of the spectrum, the headwinds facing some of the more traditional real estate subsectors, like office, retail, and apartments, are well-documented in financial headlines.

The supply of new real estate developments remains reasonable. Construction pipelines have been reduced due to higher construction costs, increased return requirements, and a more challenging financing environment for developers, and could stay subdued for a while.

Public real estate companies have shown prudence in balance sheet management, avoiding forced capital-raising events that plagued the sector during the Great Financial Crisis. Balance sheets are generally in good health, with the loan-to-value (LTV) ratio for the sector currently around 32%. While publicly-traded companies benefit from access to long-term fixed-rate debt, private market players face significant challenges, especially those that are highly leveraged with short-term and variable-rate debt. This dynamic is setting up attractive investment opportunities for the listed real estate players to acquire assets at favourable prices from forced sellers.

The performance of the listed real estate market in 2024 is still expected to be influenced significantly by broader economic conditions and capital market dynamics. However, it is poised for cautious optimism. Stabilising interest rates will be a key factor influencing transaction activity and performance. While challenges exist, solid operating fundamentals, well-positioned balance sheets and attractive valuations relative to alternatives provide a foundation for resilience in the sector. Ongoing attention to economic conditions, interest rates and evolving market dynamics will be crucial to navigate the complexities of the real estate landscape in the coming year. The sector currently offers a forward dividend yield of roughly 4.5% and we forecast earnings will grow around 4.8% in 2024.

Global developed market equity outlook – Pieter Fourie

In 2024, we should see equity returns normalise lower because valuation levels are higher than a year ago. Last year we held an optimistic view that equity valuations were favourable after the challenges of 2022. Equity investors have essentially wiped out all the losses from 2022 after very strong equity market returns of 15% in US dollars in 2023. Notwithstanding these meaningful returns in 2023, developed global equity markets finished the year only slightly above the previous highs of 2021 in US$ terms. Global equities have been the preferred asset class for decades and are now compounding at about 8%, 11% and 14% per annum respectively in dollars, pounds and rands.

Over the last two years, the market volatility has allowed active investors to add value through stock selection. Sticking to an investment philosophy amid market volatility was crucial to avoid panic fluctuations between styles which quickly shifted in and out of favour. With market concentration at record highs, we believe a prudent approach will bear fruit in 2024, with a continued focus on business quality and valuations. Diversification will play an important role in a very concentrated global equity market, where the majority of returns in 2023 were driven by the “magnificent seven” stocks of Amazon, Google, Microsoft, NVidia, Netflix, Meta Platforms, and Apple.

November 2023 was a pivotal moment, supporting the widely-held view that the Federal Reserve has already pushed interest rates beyond the point necessary to slow down the US economy. US Treasury yields have adjusted from just above 5% to 4.4% (with bonds rallying in the process) which in turn ignited the US stock market. A downward path for interest rates will be critical to sustain an equity market rally in 2024.

As valuation conscious investors in high quality global equities, the most valuable lessons we take forward from this past year include:

• Avoid getting too emotional when equity markets decline. 2022 was highly frustrating for equity investors, but it created compelling buying opportunities for capital allocators with a multi-year investment time horizon.
• In a highly volatile environment, be prepared to lean against the trend. 2021-2022 was an opportunity to enter new positions in high quality companies at more reasonable valuations. These companies previously suffered severe drawdowns, but turned out to be big winners over 2023. Some examples are Intuit, LSE Group, Visa and SAP.
• Active management is important. 2023 offered opportunities to exit stocks which appeared expensive on various valuation measures such as Edwards Lifesciences and Yum China earlier in the year, and reinvest in them at significantly lower levels later in the year.
• Patience is a virtue in investing. Often compelling investment ideas take time to be recognised by investors. In 2023, companies like Fiserv, NetEase, SAP, Novartis, LSE Group, and Intercontinental Hotels performed very well after lagging during the pandemic years.

Global emerging market equity outlook – Feroz Basa

We hold a positive outlook for emerging markets, driven by their relatively low valuations and a supportive global backdrop. We see tentative signs that China’s growth is stabilising and that the US is on track for a soft landing which, in turn, should support a weaker dollar. Despite the tightening of global financial conditions, emerging markets performed reasonably well in 2023. Notably, Mexico, Brazil and India exceeded expectations. Mexico benefited from US resilience and nearshoring inflows, Brazil’s agricultural sector experienced a positive terms of trade shock and India sustained growth in its manufacturing sector on the back of very strong domestic consumption.

However, Chinese growth disappointed investors in 2023 due to a sharp decline in public confidence, which can be seen in both consumer and business metrics, coupled with an ageing population and record-high youth unemployment. Imbalances in the property market became more acute and investors, concerned about a further correction in real estate prices, continued to accumulate precautionary savings. Given China’s state-controlled economy and potential fiscal firepower, we anticipate policymakers will roll out effective measures to boost confidence and reverse the growth downtrend (4-5% expected GDP growth for 2024 is still respectable). Over the medium to long term, China will need to transition to a new growth model. Much-needed investment in infrastructure can replace the low marginal productivity real estate model. However, this does not make China “uninvestible”, since, based on the valuations and the fundamentals of high-quality companies, we believe it offers excellent investment opportunities. One example is our largest investment holding in China, Pinduoduo, whose booming local and offshore (Temu) ecommerce operations are delivering earnings growth significantly above expectations.

Elsewhere in Asia, India outperformed the rest of emerging markets in 2023, and we expect its strong growth dynamics will continue, driven by the manufacturing and agricultural sectors. The Association of Southeast Asian Nations (ASEAN) recorded decent growth in 2023 despite China’s slowdown, and we expect growth to accelerate in 2024, especially in Indonesia, Malaysia and Vietnam. Korea should resume its exports-led recovery after the Chinese-driven slowdown in the first half of 2023. In Latin America, we expect Mexico to decelerate after a solid year driven by a combination of a resilient US economy translating into strong remittances, nearshoring flows, and higher public investment ahead of the 2024 elections. Brazil will decelerate, but the slowdown will be smoothed out as the central bank continues easing monetary policy.

Overall, emerging markets are well-positioned to display strong growth dynamics in 2024. Decade-low valuations relative to developed markets offer downside protection, while optionality from a potentially weaker dollar (always good for these economies) provide further tailwinds.

Global developed market bonds – Thomas Wells

After a torrid 2022, 2023 was a better year for global bond investors. In 2024, we believe that the rise in yields seen in the last two years will make global bonds highly investable again. Crucially, they can play the important diversification role that they previously fulfilled in portfolios. However, we doubt whether the full effect of rising rates on either companies or consumers has been felt yet, because rate increases always have a lagged effect. This means that in 2024 investors should be alive to the risk of negative surprises or setbacks – what the statisticians call ‘tail risks’.

Given the ramp-up in interest rates over the last two years, it might be assumed that investors could start to forget about inflation. Unfortunately, this is not the case. While the major central banks have worked hard to bring inflation down, it remains higher than they would want it to be. Central banks are pragmatic – they will not keep raising rates to crush inflation to 0% if it risks triggering a severe downturn in the economy. We also believe that ‘the golden age of globalisation’ is over. Onshoring and nearshoring will make supply chains more resilient (and they will probably have better ESG characteristics) but they will also be more expensive.

As well as inflation, global bond investors have to consider interest rates. By December 2023 the market was pricing in a ~60% chance of a Fed rate cut by end-March 2024 and 100% likelihood that rates will be cut by end-May 2024. The market thinks that rates are headed lower, which is helpful for rate-sensitive assets. Given how much work they have done, central banks are likely to proceed more cautiously, but the rate backdrop for 2024 is supportive of global bonds.

Sluggish but probably positive growth in 2024 should paint a robust fundamental picture for credit assets. The higher-quality investment grade area, where yields are circa 1.3% more than in government debt, looks quite attractive but investors should be selective. Credit spreads at these levels do not offer a huge cushion, but in defensive sectors there is probably value.

Lastly, we encourage anyone who allocates assets to think about the following. Global government bonds are government-backed, offer attractive yields (today, almost 60% of global government debt offers a yield of >3%, according to Bloomberg), provide a known coupon and can perform if economic data proves to be weaker than expected. The case for fixed income across the developed world is back.

Disclaimer:
Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Satrix Investments (Pty) Ltd, Amplify Investment Partners (Pty) Ltd (“Amplify”), Sanlam Africa Real Estate Advisor Pty Ltd (“SAREA”), Simeka Wealth (Pty) Ltd and Absa Alternative Asset Management (Pty) Ltd (“AAM”); and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”), Satrix Managers (RF) (Pty) Ltd (“Satrix”) and Absa Fund Managers (RF) (Pty) Ltd. Sanlam is a full member of ASISA. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/collective investment units/unit trusts may go down as well as up.

The information in this article does not constitute financial advice. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.