The S&P 500 powered to its 52nd record high of 2024 this week, indicating that the year may end on a really strong note. The index has returned around 26% in dollar terms for the year-to-date, giving investors every reason to smile. Yet, the extent of the strong bull run from October 2022 into 2024 raises the inevitable question of how much longer it can last.
After all, we are entering a new period of volatility with Donald Trump set to be inaugurated as US president early in 2025. There are credible reasons to be concerned that some of his policies around tariffs and migration could have a negative impact on company earnings, US inflation, and global economic growth.
In addition, the geopolitical climate remains tense and uncertain. While Israel has signed a welcome ceasefire with Hezbollah in Lebanon, prospects for a similar deal in Gaza remain dim. The war between Ukraine and Russia also remains ongoing and the possibility of either of these conflicts escalating into wider wars cannot be discounted.
As these risks pile up, some fret that equities performance is disproportionately fuelled by the AI boom and that any potential good news is already baked into current market levels. It’s understandable that many investors are worrying about how much higher valuations of the Magnificent Seven Big Tech stocks can go.
Does this mean that now is an opportune time to take profits while markets are at the crest of the wave? Our answer is, as always, dependent on each client’s personal goals and circumstances. For clients that have substantial amounts of cash to invest, we are taking a cautious approach of phasing in their funds over a period of time, but at the same time, we will adopt an opportunistic approach in the event of market pullbacks.
However, for longer-term investors, our general advice will be to “hold the line”, even during times of turmoil and daily “noise”. While investors can still currently get above-US-inflation interest rates on cash in dollar deposits, rates are still expected to fall over the year to come. Cash returns are therefore likely to become less attractive than they are today.
Furthermore, we believe that the uncertain policy implementation characteristic of a Trump presidency not only elevates downside risks, but also possible upside returns. Along with the risks Trump raises, his preference for low taxes and less regulation could give corporate earnings a boost. Meanwhile, he might bring new ideas and impetus to resolving the crises in Ukraine and the Middle East.
We referred to this as the ‘fat-tails’ effect in our newsletter last week. While investors might want to shield themselves from the downside risks, they should also ask if they are willing to miss out on the substantial upside opportunity. This is especially the case if the markets and Congress rein in Trump’s worst excesses.
It is also worth noting that while some tech stocks have high P:E ratios, there is still scope for other sectors to rally strongly. Even if Big Tech stocks come under pressure, we believe that the quality stocks that we include in our clients’ portfolios could perform well as they have significantly lagged the S&P 500, and their valuations are therefore not stretched. They also include sectors that may benefit from deregulation under Trump.
Furthermore, economists and analysts at some of the world’s largest asset managers and banks predict that markets will deliver good returns next year – though not as good as 2024. Goldman Sachs, Barclays and RBC Capital Markets all forecast that the S&P 500 will return around 10% in 2025.
These optimistic forecasts illustrate that a collapse in market valuations is not a certainty. Our approach aims to mitigate the short and medium-term risks clients face in the year to come through our actively managed components, while ensuring that they don’t miss out on the opportunity to build on the growth of their investments via our broad index exposures.
“In a world of anomalies, there are plenty of bright spots. Identifying the opportunities created by policy choices and geopolitical shifts will be as important as safeguarding against the risks they entail.”
– Monica Defend, Head of Amundi Investment Institute
Global News
- The S&P 500 has surged more than 25% in 2024, on track for a second year of returns above 20%, a run that’s occurred just four times in the past 100 years. The index extended its winning streak on Tuesday to seven sessions, setting its 52nd record of the year, while investors largely shrugged off Trump’s tariff plan.
- The US economy expanded at a solid pace in the third quarter, largely powered by a broad-based advance in consumer spending as inflation continued to cool. Gross domestic product increased at a 2.8% annualised pace in the third quarter, the second estimate of the figures from the Bureau of Economic Analysis showed on Wednesday. The economy’s primary growth engine, consumer spending, advanced 3.5%, the most this year.
- The US Justice Department has ended its criminal cases against Trump, marking the conclusion of an unprecedented federal prosecution of a former president. Special Counsel Jack Smith, who had charged Trump with obstructing the 2020 election and mishandling national security information, informed the court on Monday that the department would no longer pursue these cases following his re-election.
- Federal Reserve Bank of Minneapolis President Neel Kashkari said a 25-basis-point rate cut remains a reasonable option for the Fed’s December meeting, citing the economy’s resilience despite higher rates. Policymakers, who have recently cut rates by 75 basis points, will review inflation and labour data before deciding. Kashkari noted inflation’s slower progress toward the 2% target but remains confident in its gradual decline alongside a strong labour market. Yet, interest-rate strategists at Citigroup say the Fed should pause its interest-rate cuts.
- Trump is vowing to protect American-made cars through steep tariffs on imports. On Monday, he announced plans to impose a 25% tariff on all goods coming from Mexico or Canada on his first day in office in January. However, the US does not build any cars 100% in the country, with at least 25% of parts being sourced from Canada and Mexico. The Canadian dollar fell to a four-year low on the news, while the peso traded close to its weakest since 2022. China’s yuan edged lower.
- US consumers face “significant consequences” from Trump’s proposed tariffs on Canada, according to Goldman Sachs Group. Casting doubt on its implementation, Daan Struyven, the head of commodities research for Goldman, says the 25% levy on all products from Canada proposed by Trump would likely raise the price of fuels in the US. The US imports almost four million barrels of Canadian crude a day, which allows American producers to export more of their own oil.
- Fresh US sanctions against Russian banks have caused a further slide in the Ruble, putting at risk some of the last channels of direct foreign currency flows into the country. The currency has fallen almost 8% against the dollar since 21 November, when the US sanctioned some 50 Russian banks with connections to the global financial system. On Wednesday, the currency went beyond 108 per dollar after passing 105 the day before, the weakest levels since March 2022 during the aftermath of the first sweeping sanctions over the invasion of Ukraine.
- The Biden administration is proposing a rule that would require the US government to cover obesity drugs for millions of Americans. The Medicare insurance program has been barred by law from paying for weight-loss injections like Novo Nordisk’s Wegovy and Eli Lilly & Company’s Zepbound, though similar drugs for conditions such as diabetes are covered. The Biden plan relies on a new interpretation of the law, based on a fresh understanding of obesity as a disease.
- The US Federal Trade Commission has opened an antitrust investigation into Microsoft focusing on everything from the company’s cloud computing and software licensing businesses to cybersecurity offerings and AI products. After more than a year of conducting informal interviews with competitors and business partners, antitrust enforcers have crafted a detailed request, which is hundreds of pages long, to force Microsoft to turn over information, according to sources.
- Global smartphone sales saw a strong rebound in 2024 after two years of decline, though Apple achieved only modest growth, according to an IDC report released on Wednesday. The report highlights the rapid progress of Android-based competitors in China and emerging markets. Total smartphone shipments are expected to increase by 6.2% to approximately 1.24 billion units this year. However, iPhone shipments likely grew by just 0.4%. Despite this, Apple remains the clear profit leader, with an average selling price exceeding $1,000, compared to an estimated $295 for Android competitors.
- The global frenzy in AI has turned an obscure Japanese company into a stock-market star. Fujikura, which makes wire cabling for data centres, is the best performer on the Nikkei 225 Stock Average index, with its shares surging more than 400% this year. It joined the MSCI global standard indexes on 25 November as the sole addition from Japan while eight other companies from the country were removed. The rapid growth of the industry has surprised Fujikura itself.
- Macy’s is delaying its third-quarter earnings release after an investigation revealed an employee hid more than $100 million of expenses over several years. The worker “intentionally” hid $132 million to $154 million of delivery expenses through false accounting entries from the end of 2021 through to 2 November this year, the company said on Monday. The employee is no longer with the retailer. Macy’s declined to provide information on the employee’s motive or how the accounting entries slipped by its auditor, KPMG, for years.
- As at Wednesday’s close the S&P 500 was 0.5% up for the week.
Local News
- The government’s draft policy blueprint for the medium term has targeted GDP growth ranging from 2% to 5.4% by 2029, the Deputy Minister of Planning, Monitoring, and Evaluation Seiso Mohai said on Wednesday. The projection assumes that, over the next five years, the government will implement accelerated reforms while addressing infrastructure and fiscal pressures. President Cyril Ramaphosa is expected to define the final medium-term development plan, to guide the Government of National Unity partners, in his 2025 State of the Nation address in February 2025.
- The IMF on Wednesday urged South Africa to adopt a more ambitious fiscal consolidation plan and consider a debt ceiling to stabilise its economy and ensure sustainable growth. The mission recommends a consolidation effort of 1% of GDP per year over the next three years to achieve a primary surplus sufficient to lower debt to around 60%-70% in the next five to 10 years. It also said South Africa’s economic outlook was improving and activity was recovering, and revised South Africa’s GDP growth projections from the 0.9% predicted at mid-year to 1.1%.
- Home Affairs Minister Leon Schreiber said progress has been made in implementing a digital system to turn the department into a fully automated hub to “supercharge” tourism and restore national security integrity. Addressing the National Council of Provinces on Wednesday, Schreiber said he was encouraged by the progress made since the government of national unity came into office, though there was still a long way to go to deliver on the programme, dubbed Home Affairs @Home.
- Goldman Sachs Group believes there will be a steep slowdown in South African inflation next year, setting itself apart from other observers and the country’s central bank. It anticipates that inflation will average 3.3% next year, and then will pick up and stabilise at about 4%. That compares with the 4.2% median estimate of 30 economists surveyed by Bloomberg and 4% forecast by the central bank.
- South Africa has emerged as Africa’s premier luxury destination, defying economic pressures with a thriving high-end retail sector, according to the seventh annual State of the Luxury market report by Luxity. The continent’s appetite for high-end goods, particularly locally, remained undiminished, the report, released on Monday, said. This is despite sub-Saharan Africa’s GDP per capita dropping to $1,540 and inflation soaring to 15.28%.
- Resources group Anglo American has raised R9.6 billion from its accelerated bookbuild offering of shares in Anglo American Platinum (Amplats). Anglo American South Africa sold 17.5 million Amplats shares, representing about 6.6% of the miner’s total issued ordinary share capital. Amplat’s demerger is on track for completion by the middle of 2025, it said on Wednesday. On Monday, it said that it had entered into definitive agreements to sell all its steelmaking coal business to generate up to $4.9 billion in total cash proceeds.
- Boxer, in which Pick n Pay holds a 65.6 % interest, listed on the JSE on Thursday, marking a milestone in its holding company’s 47-year journey and positioning it for future growth. This is the first listing of a soft discount retailer in South Africa and one of the most anticipated listings in nearly a decade. Shares closed 17% above its IPO price to R63.01. Ahead of the listing, Boxer said it had already raised R8.5 billion from selected qualifying investors at a subscription price of R54 apiece. The IPO was well supported by both local and international investors.
- Life Healthcare on Tuesday declared a special dividend of 70c a share on top of a final dividend of 31c for the year to 30 September buoyed by a strong performance in its core private hospital business and a surge in sales of its tracer drug NeuraCeq. This takes the total payout to shareholders to R10.6 billion for the year. Revenue from continuing operations was up 12.7% year-on-year to R25.5 billion, while headline earnings per share were up 58.9% for continuing operations at 139c.
- Fashion retailer Mr Price has seen strong growth this year with its share price up about 80%. Over the past 25 years, its stock has risen about 4,400%, making it one of South Africa’s most successful retailers. The company’s market value of R72 billion now exceeds that of Woolworths, Pepkor, Truworths, and The Foschini Group. According to Aeon Investment Management equity analyst Shaakir Salie, a contributor to Mr Price’s performance is its deep understanding of mass-market fashion trends.
- As at the time of writing, the rand was 0.3% stronger against the dollar and the ALSI was 1.1% down for the week.
Sources: Dynasty, Business Report, BusinessLIVE, CNN, Bloomberg, NYT, News24, etc.
