It’s no surprise that 2023 was yet another challenging year for South African investors (and everyone else).

Even though global equity markets rallied towards the end of the year, it was a nail-biting ride through interest-rate hikes and elevated inflation – a delayed after-effect of the Covid-19 pandemic.

Although it’s human nature to be hopeful at the beginning of the year, we’re all aware that the world faces significant challenges, including geopolitical conflict, weak growth and a rise in climate risks.

Should we look to 2023 for clues as to what to expect in 2024? Not necessarily, says Izak Odendaal, Chief Investment Strategist at Old Mutual Wealth.

“It’s worth remembering that 2023 started on a very pessimistic footing, with a widespread expectation of a recession in the US and other major developed economies due to the rapid rise in interest rates,” he says.

“However, the US economy defied the gloomy predictions and inflation steadily declined to the point where rate hikes were no longer needed. The net result: the global benchmark MSCI All Country World Index returned 22.5% in dollars in 2023. Instead of a correction, we got a bull market.”

Overall, global equities posted a return of 33%, says Dennis Murray, divisional head and principal investment consultant at Old Mutual. However, he warns against betting on any particular asset class this year, as it is impossible to tell which will be the best performer.

“The best course of action is to diversify across various asset classes to provide the best possible opportunity to achieve real returns in the long term, as well as control risks,” he cautions.

A diversified portfolio can also help guard against inflation.

Rate cuts on the cards?

Stubborn inflation and the threat of a recession notwithstanding, the US Federal Reserve may trim rates by three or four 25-basis-point cuts during 2024, says Odendaal, with the market pricing in close to six cuts.

Because South Africa often follows what the “Fed” does – and because our domestic inflation outlook is slowly improving – we may be in for a rate cut in late mid-2024.

With US economic activity expected to remain solid for the most part, and wage growth improving, there’s reason to be optimistic about global market performance, despite a sluggish Eurozone economy. However, if the US interest rates start to fall due to recession, there could be trouble ahead.

China-watchers will have noticed that Chinese equities lost 10% in 2023 and halved the return of the MSCI Emerging Markets Index.

South Africa was another emerging-market disappointment – no surprise given its close ties to China. However, the Johannesburg Stock Exchange proved resilient, with positive returns in rand terms. Local equities continue to offer value for investors.

“Despite the high inflation, South African stocks demonstrated resilience with a solid 9.3% return, alongside commendable performance in local bonds and property,” says Murray.

He recommends a balanced approach regarding global exposure, although regulatory changes allow for increased offshore investment. “While global equities have dominated in recent years, historical data shows periods where South African equities outperformed their global counterparts,” he points out.

What to expect in South Africa

South Africa faces a fiscal crunch, and we can expect continued weak growth.

“The South African economy is deeply constrained by unreliable infrastructure and inefficient public services, and it crawls along, but it’s not collapsing,” says Odendaal.

“It will struggle to beat 2% growth on a sustained basis until there is meaningful progress in crowding in private sector participation in rail, ports and electricity.”

Ironically, we may have a measure of policy certainty because we’re in an election year, since the ANC is unlikely to be ousted, even if its support does slip below 50%.

“The outlook is largely one of broad policy continuity and ongoing gradual progress in tackling the pressing concerns of loadshedding, a crumbling logistics network, crime, corruption and excess government debt,” he says, adding that we’re likely to see ongoing fiscal consolidation.

Remain invested

Odendaal recommends diversifying portfolios and positioning them for a range of possible outcomes, since it’s impossible to predict what the market will do.

“Just as 2023 started on a pessimistic note and ended with unexpectedly strong returns, the opposite is possible given the prevailing optimism at the start of 2024,” he cautions.

That said, it is important to remain invested and not try to time the market, although many investors retreated into cash in 2023.

“Cash may be safe in the short term, but history shows that South African stocks consistently outperform cash in the long term,” Murray notes. “Investors should consider the danger of relying solely on cash for retirement, especially when aiming for returns above CPI+5.”

He recommends investors spread their investments across asset classes and stick to their long-term plans, making minimal tweaks if these are warranted. “Be patient, stay calm, and avoid greed,” he says. “Above all, don’t fall for ‘get-rich-quick’ schemes – steady growth is best.”

Odendaal concludes: “The best strategy is to diversify but stay invested, regardless of the noise. As always, remaining in the market means you won’t miss out on the best days in the market, which will stand you in good stead in years to come.”