By Chantal Marx
The year started off with significant caution in the system as the geopolitical environment remained uncertain and a major proportion of the world's democracies were heading into elections. The United States (US) hard landing/soft landing narrative continued but the prospect of interest rate cuts in most major economies gave investors hope that they will still be able to get reasonable returns from markets in the latter part of the year. At the same time, China continued to struggle for growth, local elections were coming up, and network industry constraints remained front and centre.
The US has not landed at all, the interest rate cuts happened but were late, and China continued to disappoint. Our election outcome was benign, loadshedding dissipated completely, but local transport infrastructure constraints intensified, highlighting that structural constraints to growth remain in South Africa
Our expectation for markets at the start of the year was trepidatious with below-trend economic growth having been anticipated for most economies.
The second half looked more promising than the first and we thought there would be good opportunities to add to risk exposure late in the first half. Our preference at the start of the year was for bonds over equities.
While bond outperformance proved to be the correct assumption for many markets, including South Africa, US exceptionalism and continued optimism over artificial intelligence (AI) drove another year of very strong returns for the US equity market (in both the first and second half of the year) and, US economic growth expectations were continuously upgraded throughout the year.
Returns in the US stock market were again driven by the so-called "Magnificent-Seven" but dominated by another very strong year for Nvidia.
Nvidia's importance has grown as a main driver of US equity returns and its influence in the global context is now considerable, with its total value now exceeding that of many major stock markets (in totality) including the United Kingdom (UK), France and Germany. It is therefore not surprising that its results announcements have become a major "macro event", drawing attention akin to a Federal Reserve interest rate announcement.
We thought that China's "growth interrupted" narrative would remain an issue. This was mainly a function of a weak property market and other structural constraints.
Despite several interventions announced by Chinese officials on the fiscal and monetary front, stimulus measures have had a limited impact on consumer confidence in the world's second largest economy.
Global geopolitics was expected to be a dominating factor, with 76 countries heading to the polls.
This was indeed a very volatile year from a geopolitical and political perspective, with heightened volatility notably around several major elections and in response to escalating action in the Israel/Hamas conflict which spilled into Lebanon (Hezbollah) and Iran. A persistent flight to the safety and continuing central bank buying supported the gold price, although the US dollar strength in the week before and the week following the US elections outcome saw the price retreat from its 30 October peak of just under $2800/oz.
Our economics team anticipated local growth to lift to just over 1% this year. Network industry constraints were expected to continue to bite, but lower inflation, improving external demand, and some interest rate relief was set to provide support.
The growth outlook for 2024 was slightly tempered as the year progressed (to 1% at the time of writing) - with continued bottlenecks in South Africa's logistics sector (mainly Transnet railway corridors and ports) outweighing the positive impact of a suspension of loadshedding since the second quarter. Outer year growth expectations were upgraded following the election outcome and more signs that reform implementation (via Operation Vulindlela) is gaining momentum.
In our view, the local equity market was undervalued, and SA bond real rates were still attractive. We anticipated heightened volatility in asset prices and the rand exchange rate ahead of the election. Overall, we expected above money-market returns from local risk assets in 2024 weighted towards the latter part of the year.
Both bonds and the equity market performed well - particularly in the second half of the year. The equity performance was dragged on by softness in the Resources segment as industrial commodity prices remained soft due to persistent weakness in China. The rand hedges also had a negative impact on the overall index performance. In the SA Inc stable, the performance was notably better following a calm election outcome with possible positive implications for the business environment, and the suspension of loadshedding for most of the year. The JSE Financial 15 Index returned 24.2% and the Small Cap Index delivered 32.0%.
2025 - The year ahead
When considering our expectations and positioning for 2025, we are cognisant of the fact that a lot has changed relative to the start of 2024. The main risk event has changed from US recession fears to inflation fears following the outcome of the US election.
In SA, we see growth lifting to just below 2.0% next year as better confidence, steady energy supply coupled with lower inflation, interest rate relief, and a continued increase in fixed investment (off a low base) helps push growth higher.
