In this year-end wrap, we review how local and offshore investment markets performed in 2023, look at the key themes that drove markets, and look at some of the risks and opportunities for 2024.
The past year continued to test investors’ patience as the 2022 market roller-coaster continued into 2023. This was due mainly to sharply rising interest rates and the market’s attempt to forecast the effects thereof. The JSE All Share Index returned 3% in 2022 and 7% in 2023 year to date, but this has included large swings of more than 10% down and up in both years, as persistently higher inflation scared global markets.
JSE All Share Index
Global equities are down over the last two years, despite a recent sharp 10% upwards spike.
MSCI World Index ($)
Moderate risk portfolios that have been invested into multi-asset balanced funds, have produced below average inflation returns for the last two years, returning an average 4.8% per annum versus 6.7% average inflation.
SA multi-asset – high equity index
South African equity markets are driven mostly by global economics and investment sentiment as approximately 75% of the JSE All Share Index company revenues are generated from outside SA.
2023 – Key Global Market Themes
Inflation, inflation, inflation
The investment market’s obsession with the rise in inflation and the timing of its eventual decline has been the major driver of global markets.
Global inflation
Consequently, global interest rates have risen significantly over the last two years. The consensus forecast is that interest rates have now peaked and should start declining in 2024.
US interest rates
AI – Magnificent 7 – the major equity driver
The performance of global equity markets in 2023 is characterised as a “narrow market”. This means that only a few shares contributed meaningfully to global returns in 2023. These shares have been dubbed the “Magnificent 7” and enjoyed enormous hype on the back of Artificial Intelligence (AI). AI is the new technology that is expected to change the world and therefore meaningful participants in the industry saw their share prices rocket.
The magnificent 7 shares comprise a massive 30% of the S&P 500 market capitalisation and combined, were the major driver of the S&P 500’s returns of 18% in 2023. The graph below shows, stripping out the “magnificent 7”, the S&P 500’s growth from pre-COVID has been muted.
The S&P 500’s P/E ratio is currently 25x, versus the average “Magnificent 7” P/E of 45x, illustrating an extremely inflated value gap.
P/E ratios of Magnificent 7
Sector spikes from new technologies are not uncommon, and often require some luck to participate in their initial success, but often investors enter late – at the top of the share price hype – and can wait for many years to recover their costs. Such an example was the IT bubble in 1999, which took 15 years to recover from its peak.
A strong US Dollar
US Dollar real exchange rate
The US Dollar has benefited from many years of stimulus pumped into the economy post the Global Financial Crisis (GFC) in 2007 and then COVID in 2020. This stimulus is now being withdrawn with sharply higher interest rates, which is likely to be negative for the US Dollar over the next few years.
A likely weaker US Dollar into 2024 is positive for emerging markets, commodities, and SA.
China – Waning or Recovering
China contributes 18% to global GDP, but over the last few years its growth has been disappointing and may not reach this year’s government GDP forecast of 5%. Investor confidence has waned as the country faces several structural challenges: a property imbalance, weakening demographics and geopolitical uncertainties.
Its stock market has halved over the last 5 years and now trades at near a historical low P/E of 12x, a 33% discount to the MSCI World Index of 18x.
The government understands the need to maintain good growth and has started to stimulate the economy. Consequently, if growth rates are maintained, China makes for an attractive entry point into its relatively cheap market.
Climate change – All talk, no results
Record high temperatures were observed in many countries this year and record low temperatures are expected in some parts of the northern hemisphere this winter.
Floods and extreme weather conditions have increased significantly over the last twenty years. Although this global problem is recognised by the huge increase in attendance at this year’s climate change conference, COP (conference of the parties), now almost 80 000 delegates, there is no improvement in CO2 emissions or a decline in fossil fuel use.
COP Delegates and CO2 emissions
Global warming remains a major threat to our planet and will bear enormous costs. Unfortunately, politics and related greed are preventing the necessary legislation to be implemented to arrest this growing problem. Consequently, there will be winners and losers, but unfortunately, in the long term, we will be negatively impacted.
SA’s woes continue, but there is hope
Eskom’s future – the biggest driver of local markets
2023 had record loadshedding, which is estimated to have detracted 2% from GDP growth and lost an estimated 860 000 jobs.
Number loadshedding hours and days
However, the outlook for Eskom is more positive with electricity supply to improve substantially in 2024. This is supported by a growing private sector solar supply of currently + 4400MW.
Despite the numerous other infrastructural problems, which the private sector is being co-opted to amend, Eskom’s failure is the biggest deterrent to foreign investors. Any positive signs of improvement should drive local share prices up materially.
SA politics and the 2024 election focus
The year has been marked by the government’s foreign policy discomforting much of the country as it sides with eastern allies. This occurred despite the country’s biggest trading partners being western allies -Europe and the US – who have not alienated South African trading.
Electioneering for 2024 has started and it’s likely the ANC will not achieve a majority. This will result in a coalition government, which frankly can only be better than the current ANC government, barring an unlikely EFF-ANC hook up.
SA’s debt trap resurfacing
The mini budget showed unsurprisingly that government cannot stick to its reduced spending budget, in addition to a revenue shortfall, which combined, has resulted in a shortfall of R57bn compared with the February budget. This will increase the budget deficit to GDP in 2023 to 4.9%, up from 4% per the February budget.
Gross debt will rise from R4.8bn to R6bn in 2025/26, a debt to GDP ratio of 77%. This further rise in debt is concerning and has raised the risk of spiralling debt, which can only be avoided with the benefits of substantial economic growth of more than 4% p.a.
The Prosperity Fund continues with good, stable returns
The Prosperity Worldwide Flexible Fund of Funds is a conservative fund with an emphasis on capital preservation. Over the last two challenging market years, the fund has returned an average 8.5% p.a. (net of fees).
The fund is well suited to investors who want offshore exposure and a steady investment return.
Prosperity Worldwide Flexible Fund of Funds since September 2014
Investonline continues with strong growth
Investonline has had another good year. Our client retention remains high, we continue to onboard new investors, many of whom were disgruntled with their previous financial advisers, and our financial planning offering has been greatly enhanced.
We are proud that we have two new (certified financial planners) CFPs in our team. This is testament to our culture of continuous learning to ensure that we provide the best technical advice to our clients.
Thanks to our loyal and stable client base, we are investing in new initiatives to add more value to our clients through additional services which we will release in early 2024.
We look forward to 2024 as we continue to strengthen our partnerships with our clients, and we foresee a better market environment, which should assist with better returns.
We wish you a blessed festive season and a prosperous new year.
