As South Africa prepares to celebrate three decades of democracy amid a potential election upset and shifting global political landscape, Alexforbes believes that there are windows of opportunity that fund managers can take advantage of to find value for their clients.
This will be good news to investors, particularly in H2 2024, when risk sentiment is expected to turn positively towards emerging markets.
Turmoil will be left behind
Upon reflection, 2023 can be characterised as a year of inflections, as sentiment oscillated between recession fears at the beginning of the year to anticipating a soft landing by year end. Markets also had to weather turmoil in the banking sector, which saw authorities act quickly to avert a broader systemic crisis. Then came the pivot of the Federal Reserve Bank in the US, which provided some forward guidance. The result of this was that rates remained higher for a longer period. In 2024, rates will remain at their peak and will likely ease during the year.
Alexforbes Chief Economist, Mpho Molopyane, points out that, with the turmoil of 2023 in the rear view mirror, we are cautiously optimistic about the year ahead. ‘In the absence of adverse shocks, it looks like central banks will be able to bring inflation back to target without crashing the global economy – achieving the so-called ‘soft-landing’ scenario,’ says Molopyane.
However, she adds that uncertainty remains around the extent of the slowdown as high interest rates continue to filter through the economy. The election packed calendar also points to another year of uncertainty, with electioneering and election upsets likely to add to market volatility.
‘With overall global growth forecast to slow for the third consecutive year and inflation expected to edge closer to central bank targets, we believe policy normalisation will ensue in the second half of the year,’ says Molopyane.
This is good news for trustees who should be encouraged by the fact that there a recovery period may be associated with this soft-landing’ scenario. However, expectations will need to be managed if high interest rates and the outcome of the election have a major impact on economic growth.
A year of two halves
Locally, 2024 looks set to be a year of two halves. The first half will likely be dominated by election campaigning ahead of the May-August national elections; the second half will be dominated by global developments as risk sentiment towards emerging markets is expected to turn positive.
‘While opinion polls currently show the ANC losing an outright majority over employment, corruption and load shedding concerns, it is still too early to call the 2024 election results,’ warns Molopyane.
She adds that domestic growth prospects look promising, with improving self-generation electrical capacity, easing load shedding intensity and continued recovery in investment expected to lift growth to 1.2% in 2024 from 0.6% in 2023. In addition, household consumption will benefit from the continued decline in inflation and lower interest rates, further boosting overall growth.
‘While uncertainty remains a central theme in 2024, a well diversified portfolio remains essential. Our expectation of a ‘soft landing’ and for interest rate cuts to continue in 2025, points to a favourable backdrop for both bonds and equities. Industrial metals face headwinds associated with slowing global growth and tapered Chinese demand. Finally, gold should benefit from declining interest rates,’ says Molopyane.
What does this mean for trustees? The hunt for value should include active diversification and passive investments as sentiment is that there are still headwinds that could impact growth.
Windows of opportunity
On the upside, Molopyane points out that a faster-than-expected decline in inflation could lead to deeper rate cuts and better-than-expected global growth, which opens the window of opportunities for fund managers to find value for their clients.
Senzo Langa, Deputy Chief Investment Officer at Alexforbes, points out that, given the possible impending shifts in the global political landscape, it may be fortuitous that large South African fund managers keep a healthy exposure to local assets. Favourable valuations are also driving this. However, a higher offshore allocation could be beneficial should there be a global recession.
‘The average offshore allocation of South African fund managers is 35%. However, some managers have opted to utilise the full allocation of 45%. Finally, some managers are still below 30%. This has created a dispersion in performance with the gap between the best performing and the worst performing large balanced managers (in 2023) to be around 8%,’ says Langa.
Passive is king
Given the challenging global economic environment, fuelled by increased volatility and the possibility of longer-than-expected higher interest rates, the global market has been driven by narrow factors. Technology stocks such as Nvidia (239%), Meta (194%), Tesla (102%), Amazon (81%), Alphabet (59%), Microsoft (57%) and Apple (48%) are showing their dominance. This has made it difficult for active managers to outperform the benchmark.
This is good news for trustees as they know which stocks will overtake commodities in a market where clients are desperate for some semblance of increased returns. Technology stocks will continue to grow as countries increasingly migrate towards hybrid, service-based economies. South Africa cannot lag behind forever.
Passive investing will continue to dominate in 2024. Globally rated Exchange Traded Funds (ETF) continued gaining traction in 2023 at the expense of active managers.
According to the S&P Indices versus Active (SPIVA) benchmark (which focuses on the US, Europe and Canada), nearly 90% of the active managers underperformed the respective equity indices over the past five years. In South Africa, close to 50% of active managers underperformed equity indices over a similar period. This is owing to a narrow driven market locally and globally.
This environment sets the tone for market concentration, where almost 75% of active find managers are considering a strategic consolidation with other asset managers. ‘Some of the factors driving this include access to new segments, which will generate new opportunities for investors, and leveraging the experience of highly skilled individuals or teams from other asset managers,’ says Langa who says that we may see trustees embrace ETFs more in the future.
Growth in alternative investments
Given the volatile market environment, investors will continue looking for alternative sources to generate returns and protect capital, resulting in growth in the global private market and hedge fund spaces.
Lebo Thubusi, Deputy Chief Investment Officer at Alexforbes, points out that some key trends in the alternatives space over 2024 include:
- the lower correlation to traditional listed markets exposed hedge fund strategies leading to longer term outperformance;
- the private market growth accompanied by the resurgence of private debt; and
- the emergence of the specialised private equity manager globally.
A pivotal theme to look out for locally is the evolution of the South African infrastructure environment.
‘There is an opportunity in the current environment to focus on infrastructure related investments that we believe will have a dual benefit of commercial and social returns,’ says Thubusi.
According to the recent SAVCA survey, the key focus within the South African private market space will be on transformation, the growth in funds under management, and the diversification of manager product offerings to clients. This is important for trustees.
In control, confident and secure in your financial journey
In an environment that might see lower growth and potential consolidation, asset managers who are agile, forward thinking and adept at identifying emerging trends and opportunities are likely to thrive in dynamic environments. This sentiment should carry over to trustees as they can increase their value proposition by embracing this blueprint.