Following the barnstorming performance of global equities markets in 2023, the bull run continued throughout the first quarter of this year. Investors have embraced global returns, with the S&P 500 ending Q1 2024 up 10.56%, and the MSCI World gaining just over 9%. Markets remained buoyant on expectations that a soft landing lay ahead for the US economy.
Looking back on the quarter, investors should be cheered by the fact that market gains were not dominated by the “Magnificent Seven” companies that drove returns in 2023. Many companies across different sectors that delivered solid financial results for Q1, saw this positively reflected in their share prices, with industrials in general showing especially heartening gains.
It’s worth noting that S&P 500 returns outpaced the Nasdaq Index in Q1 2024 after underperforming the tech-heavy bourse every quarter in 2023. While four of the seven Big Tech stocks that drove markets last year – Amazon, Meta, Microsoft, and Nvidia – are still performing well, the remaining three (Alphabet, Apple, and Tesla) have lost 10.5% on average between them in Q1, significantly bucking the broader market trend.
Investors should also note that it’s not just about stocks listed in the US. The broader MSCI World index, which represents large and mid-cap stocks across 23 developed market countries, has also delivered pleasing returns. Similarly, the pan-European Stoxx 600 and the Nikkei 225 indices both touched new highs this year.
As we enter the second quarter, however, stocks are having a much bumpier ride. The same economic resilience in the US that boosted corporate earnings in Q1 is fuelling fears that the Fed will not cut rates as soon and as aggressively as was hoped for at the outset of the year. Hot inflation readings mean that the contrarian voices predicting interest rate hikes rather than cuts are growing louder.
Escalated strikes and retaliations in the Middle East – oil was up 12.72% in dollars for the quarter – is one factor that doesn’t bode well for inflation or a rapid move to interest rate cuts. The dollar’s rampant strength is another indicator suggesting that markets are now expecting the Fed to prevail on the current high-interest rate. Gold continues to gain strongly, fuelled by global uncertainty and increased purchases of the precious metal by China.
While we are still hopeful for a soft landing, there is no question that the Fed will remain in charge. Ahead of a US presidential election that is likely to be divisive and with geopolitical uncertainty spiraling, we can expect a bumpy ride ahead. We continue to position portfolios for this uncertainty through a blend of index trackers and quality funds.
South African assets lag behind
The gulf between the performance of South African assets and offshore markets continued to grow wider during Q1 2024. In rand terms, the ALSI was down 2.2% while, as measured in dollars, the index lost 5.68%. Losses on the JSE were led by financials, while resources and industrials were mostly flat. The rand ended the quarter 3.25% weaker against the dollar.
The poor performance of the JSE is really about the weakness of the South African economy, thanks to ongoing power cuts, logjams in transport infrastructure, political uncertainty ahead of the May elections, and a lack of appetite for much-needed economic structural reforms. Without bold policy changes and effective implementation, we expect continued underperformance on the part of the rand and the JSE.
In the interests of fairness, we point out that many emerging markets also suffered in this past quarter. India and China – the two largest emerging markets – delivered positive dollar returns. But Brazil, Turkey, and others joined South Africa in the ranks of the underachievers. Analysts are bullish about emerging markets going forward – and we are also cautiously positioned for any possible gains out of this sector.
Elsewhere in the newsletter, we explore how the upcoming elections might affect South Africa’s currency and markets. To sum up, we believe the mediocre returns and political uncertainties that have characterised South African markets will not be dispelled even in our best-case scenario post the elections. Hence, we believe the prospects of offshore equity opportunities relative to local counterparts remain more compelling.
Domestically, much also depends on whether the current lull in load shedding signals a sustainable improvement to the power supply. Added to this is the scope that the South African Reserve Bank has for interest rate cuts later this year. If the Fed cuts rates and the dollar weakens, the rand and the JSE may well get a boost from a global risk-on environment.