Investors have reason to be pleased with the market performance in the second quarter of 2024, with even a delay in the start of the Fed’s interest rate loosening cycle failing to dampen performance. After a robust first quarter followed by April’s relatively sharp correction, May and June saw a resumption of the upward trajectory in equity markets.
Most of our preferred funds delivered positive returns for the second quarter and the year-to-date, with the S&P and MSCI gaining 3.59% and 2.07%, respectively, in Q2.
Following a first quarter where we saw industries outside of tech deliver strong returns, the second quarter was once again dominated by the tech titans and the artificial intelligence (AI) revolution. The tech-heavy Nasdaq index gained 19.13% for the first six months of the year, with Nvidia in particular having, an outsized impact on markets.
Nvidia, one of only three stocks with a $3 trillion-plus market capitalisation, gained 154% in the first half of 2024, accounting for 25% of the total gain of the S&P 500 – an index that includes 500 companies. At one point Nvidia was the most valuable stock in the world, but it has now slid back behind Apple and Microsoft. As Clyde Rossouw, Head of Quality at Ninety One notes, the tech titans have now shown they can outperform in both a low-interest and high-interest rate environment.
The year of elections
Elections have been the major theme of 2024, with many returning surprising results. The party of Narendra Modi in India, for example, won, but not with the overwhelming majority expected.
Reverberations from a rightwards lurch in European parliamentary elections are still being felt.
Emmanuel Macron, President of France, impulsively called a snap parliamentary election following his party’s poor showing in the European parliamentary elections. The right-wing party of Marine Le Pen only just failed to secure a majority in the second round of voting due to an alliance between left-wing and centrist parties to keep her at bay.
In the UK, meanwhile, Labour under Keir Starmer secured the overwhelming parliamentary majority the pre-election polls predicted. This sets the scene for a centrist, technocratic government to take control in the UK for the next few years.
None of these elections, however, are quite as important to markets as the US presidential race.
We have a separate article in this newsletter looking at what the US presidential campaign will mean for markets in the months ahead as well as some of the scenarios that may emerge after the winner is announced. But, in brief, we believe macroeconomics and the pace of interest rate cuts will be the major factors driving the financial markets in the second half and beyond, with politics adding to volatility in the run-up to the election.
We expect moderate performance from equities markets in what remains of 2024. Interest rates seem set to remain elevated for longer than anticipated at most points in the past year and valuations are not cheap – especially for the big tech stocks in the Magnificent Seven/Five. Although we are positive about the potential for AI to drive efficiencies and profitability for leading companies in every sector of the markets in the years ahead, perhaps too much optimism may be priced into valuations in the short term.
South Africa—market-friendly election outcome but muted performance
South Africa was, of course, one of the many countries to hold national elections in the first half of 2024. The resulting Government of National Unity (GNU) – with the centre-right Democratic Alliance as part of grand coalition – is the most market-friendly outcome we could have hoped for. The results spurred a brief rally in South African assets, although a reality check seems to be setting in regarding the likely scope and implementation of meaningful reforms that will boost economic growth to the required level of 4-5% per annum.
The rand gained 3.03% against the dollar in June and 3.7% in Q2, but only 0.57% for the year-to-date. For the second quarter, the ALSI gained 8.34% in rand versus the MSCI’s gain of 0.54%, also as measured in rand. For the year-to-date, however, the ALSI is only up 5.75% in rand compared to 11.39% for the MSCI.
As this performance shows, while markets have reacted positively, they remain sceptical about the state of the South African economy and wary about a range of political risks. As the inability of the ANC and DA to form a provincial government in Gauteng shows, keeping the GNU together and functional will require a Herculean effort.
Even if the grand coalition remains stable, its work will be cut out should there be the political will to reignite the economy. A long streak without loadshedding will certainly help to spur growth and reduce operating costs for South African companies. But we would also need to see firmer action on corruption and more investment in infrastructure and public services to unlock South Africa’s potential.
Positioning for a wide range of outcomes
As such, we remain primarily focused on the enlarged set of opportunities offshore rather than on the “value play” offered by South African markets. In line with our continuous approach of challenging our processes and the objectives of maximising growth and minimising risk, we are currently undertaking a wide-ranging review of our preferred funds, as well as extensive research on other candidate funds and instruments for inclusion in our approved offerings, to ensure that our clients are optimally positioned for the future.
The end goal is to strike the right balance between quality and growth in an environment of disruptive and accelerating change, geopolitical volatility, and with an uncertain interest rate outlook. We aim to capture the gains from high-growth sectors such as tech while also ensuring that our portfolios take account of a variety of potential outcomes.