It is hard to believe that we are into the last quarter of 2024, and what a year it has been so far.

Despite concerns regarding inflation, interest rates, political change (with over two billion people set to vote Globally in 2024 in elections), and concerns around a “hard landing” in the US, global stock markets have seen strong performance. As I write, the MSCI All Countries World Index is up by around 12% year to date and 20% over the last 12 months. Since October 2022 global markets are up by somewhere in the region of 50%. At the time there were many hugely concerning issues in play – a spike in interest rates, decade high global inflation, geopolitical escalations, concerns regarding US economic growth (recession).

One would have been excused for thinking “now is a good time to sit out”. It would have been an expensive mistake. This speaks to the concept of time in the market as opposed to timing the market – there is a good graphic below on this concept of what trying to buy in and out of markets can do to returns.

That said, all that glitters is not gold. Global market performance has not been as broad based as index level performance might lead us to believe. We have seen strong performance from a relatively small cohort of mega cap companies (mostly AI and tech related). The stratospheric performance of these companies has put them into eye watering territory from a valuation perspective, and we are at a point with some parts of the market where we are seeing the “priced for perfection” phenomenon, meaning that the expectations of results required to support the prices are so high that even if results are good, the share gets punished.  Case in point is the two bouts of recent volatility that we saw relating to “disappointing earnings”. Nvidia posted its latest results and beat revenue forecasts… but by the slimmest margin in 6 quarters, and markets did not like it. The share shed 10% overnight wiping $280 BILLION of value off the share!

This is not to say that the whole market suffers from this dynamic – as we have said for some time there are segments of the market which have not attracted attention and offer good value.

There is opportunity out there, but we do caution that even with the prospect of interest rate cuts in the next weeks and months, volatility is not a thing of the past and diversified portfolios will be key.

On the local front, having just returned from school holidays, it feels like we missed spring and are straight into summer. There also seems to be a degree of positivity in some of the business and industries of clients. This could be in anticipation of interest rate cuts coming, or pent-up demand from pre-elections where people were just sitting tight before making decisions. Most of us will agree that the outcome of the midyear elections was as positive as it could have been from a market perspective and represents significant hope for the country from an economic perspective. We have seen SA assets finally get some time in the sun, with the ZAR perking up, the JSE seeing some positive movement, SA Bonds having a great run, and even the listed property sector seeing some recovery after a miserable 5-year period.

While we should all be happy about these dynamics, it is probably premature to call these improvements a SA “risk on” rally. It is worth understanding the context of the revival as more of a recovery bounce at this point than an SA rally:

• Assets like the ZAR and JSE valuations where probably oversold at the beginning of the year, reflecting poor SA macro fundamentals, a fair degree of SA pessimism, as well anxiety around the elections.
• The GNU represents a market positive outcome which has allowed SA assets to see a relief bounce from oversold levels.
• With US inflation trending back towards target, US interest rate cuts are virtually guaranteed, and this has resulted in some dollar weakness.

The GNU will need to deliver tangible outcomes before we see a change in trend around SA assets. Coalition politics are difficult at the best of times (globally there is very limited evidence of it working, even when the partners are politically aligned). Given the massive ideological differences in the bedfellows of the GNU, it remains to be seen whether the GNU will be able to deliver on its potential. In addition, we also need to be realistic and acknowledge that many of SA’s challenges are structural in nature and will take time to address. With the ANC’s next elective conference in 2027, time is not in abundance and so the GNU is going to need to deliver tangible outcomes quite quickly.

From the perspective of portfolio strategy, the key is that we shouldn’t have a binary approach. Yes, SA is seeing a bounce and hopefully the GNU will realise its potential. That said, SA economic and political risk have not magically disappeared. Portfolios need to reflect this and a balanced, diversified approach to this dynamic is key. 

Then on a more technical note, we saw the 2 Pot system on the retirement industry come into effect on 1 September – probably one of the biggest events in the industry for the last number of decades. While there is some complexity to it, the basic idea is that a portion of retirement savings contributions (1/3) will go into a pot that can be accessed prior to retirement without a member needing to leave employment (as was previously the case). All historical rights on existing retirement funds are maintained. The initial pot has been seeded with R30,000 and then will grow according to contributions and investment performance. It must be highlighted that the withdrawal is based on your marginal income tax rate – so it is potentially highly punitive. More importantly though, should investors continually dip into the savings pot they will end up with significantly smaller retirement savings – and therein lies material risk. We would strongly caution against dipping into savings prior to retirement unless unavoidable.