Janus, the Roman god that gives January its time, has two faces: One looking back into the old year, one looking forward into the next. Likewise, this is the season when asset managers, economists, and analysts gaze back at market performance for the previous year and make their predictions about what the upcoming year will bring.
Hindsight is perfect and the reasons for a strong stock market in 2023 seem obvious to us now. Artificial intelligence was a tailwind for big tech, corporate earnings held up well thanks to healthy consumer savings in rich countries, the labour market showed resilience, and investors took heart from a deceleration in inflation that should set the stage for interest rate cuts in 2024.
Yet all these developments weren’t obvious at the outset of 2023, and many commentators started the year with a bearish outlook. The majority of analysts and investors were initially bracing for a US recession and poor stock returns, anticipating a drop-off in consumer demand and weakness in the labour market that never materialised. In reality, an outsized return of 26.3% for the S&P 500 for the 12-month period vastly exceeded the most bullish forecasts that came across our desks at the beginning of the year.
It’s important to keep this in mind as we read the latest predictions for markets in 2024 from investment banks, economists, and other forecasters. Bloomberg recently analysed 650 calls and found that most participants are looking at a similar middle-of-the-road scenario as put forward in 2023: an economic slowdown, an easing of monetary policy, and positive but unexciting gains for stock markets and bonds by the end of the year.
Yet the views are far from universal, with some Pollyannas such as UBS Asset Management anticipating a bull market that rises to new highs and Cassandras such as Deutsche Bank warning clients to brace for a hard landing in the US. The eyes that gaze into the past see clearly, but the vision of those looking into the future is blurry.
As we’ve noted in previous newsletters, market watchers make educated forecasts about what the future will bring based on data they have today. As complex as their financial models will be and as much historical data as they may have at their fingertips, they lack foresight as to how all the variables will unfold so as to formulate accurate predictions about the future. They simply don’t know what will drive the markets for the rest of the year.
While we can make some informed assessments about macroeconomic conditions and corporate earnings for 2024, these can still have the power to surprise. Add the uncertainty of how the US presidential election might play out, a volatile geopolitical climate, concerns about growth in China, and other factors to the mix, and it’s hard to make any confident predictions.
At Dynasty, we believe that our investors are better served by positioning our portfolios for the longer term, rather than predicting short-term market movements. Our methodologies have been proven to build wealth over time, whilst our defensive and defendable equity selection has provided clients with a level of comfort during market downturns. We do, however, also have views of conviction. For example, our strong preference for global equity over local equity has served our clients well over many years.
“Read last year’s predictions and you’ll never again take this year’s predictions seriously.”
– Morgan Housel, New York Times Bestselling author
“In forecasting, hindsight bias is the cardinal sin”
– Philip Tetlock, Canadian-American political science writer
Global News
- The US economy continued its relentless recovery from the pandemic-induced recession and its subsequent inflationary pressures, dismissing fears of a recession by exceeding expectations with its fourth-quarter growth figures. According to the preliminary estimate released by the government on Thursday, the GDP reached a 3.3% annualised rate for the fourth quarter of 2023, exceeding analysts’ expectations of 2%. For the year as a whole, growth came in at 2.5%.
- Investors will continue to mull when the Federal Reserve will cut interest rates. The path of inflation, and how the Fed responds to it, will be key in defining the state of the economy and the direction asset prices will be headed this year.
- On the geopolitical front, the number of state-based conflicts, at over 50 across the globe, is near its highest level since 1946, according to the Peace Research Institute Oslo.
- Two months of missile, drone, and hijacking attacks against civilian ships in the Red Sea have caused the biggest diversion of international trade in decades, pushing up costs for shippers as far away as Asia and North America. The disruption is spreading, which is driving up fears of broader economic fallout.
- The US’ market capitalisation is now $38 trillion greater than that of Hong Kong and China put together, a fresh record, according to data compiled by Bloomberg. This comes as China offers value, but no catalysts, while the US market has momentum and the economy on its side. Hong Kong’s slide to a discount to mainland peers being the deepest in fifteen years is the latest sign of growing pessimism to the region among international investors.
- Microsoft hit a historic $3 trillion market valuation on Wednesday which is an indicator of how optimism over artificial intelligence has fuelled a seemingly unstoppable advance in the software giant. However the company will lay off 1,900 people across its video-game divisions including at Activision Blizzard, which it purchased for $69 billion in an acquisition that closed late last year.
- AMD had its best week since November last week, closing at a record high on Thursday and gaining another 7.1% on Friday. The stock is roughly up 65% since October. It has outpaced Nvidia as optimism builds anew around the semiconductor industry’s growth prospects. Its co-founder, Jensen Huang, made his first trip to China in four years, a low-key tour that coincided with growing concerns about Beijing’s ability to get around US chip restrictions.
- Netflix has reported its best quarter of growth since viewers were stuck at home in the early days of the pandemic. The company signed up 13.1 million new customers in the final three months of 2023, exceeding Wall Street’s estimate of 8.91 million and beating projections in every region of the world.
- IBM jumped the most in almost four years after delivering a positive outlook for revenue and cash flow in 2024, even as it expects to reduce jobs. Its cashflow will be above analysts’ estimates. The shares gained 9.5% to $190.43 at the close on Thursday in New York, the biggest single day increase since March 2020 and the stock’s highest value since June 2013.
- As at Thursday’s close the S&P 500 was 0.7% up for the week.
Local News
- The Reserve Bank left rates unchanged at 8.25% for a fourth consecutive time but is still concerned about inflation, with governor Lesetja Kganyago stating it requires more evidence that inflation will anchor at the 4.5% target “sustainably”, suggesting borrowing costs will be higher for longer. Traders expect the first interest rate cut in March.
- This year’s elections in South Africa may be slated to be the most competitive since the end of apartheid but are unlikely to bring major change to how the country is governed, according to Frans Cronje, chairman of the Social Research Foundation. He believes the ANC will probably be able to cobble together a coalition with minor rivals and retain power.
- Given the dynamics on the ground and the actions of political parties, there is more evidence that KwaZulu-Natal will be a major election battleground. Perhaps even the election battleground of 2024. It is possible that the ANC could lose its majority in this key province. Arena editor-at-large, Peter Bruce, says that former president Jacob Zuma, whose home is in KwaZulu-Natal, continues to hog headlines as he has said he was going to campaign for a new party named after the ANC’s former armed wing, Umkhonto we Sizwe.
- Ratings agency S&P Global says that banks, which have assets valued at about 110% of GDP, have the capacity to absorb more of government’s ballooning debt pile as they have liquid balance sheets. Banks’ holdings of government securities increased to about 15% of the sector’s total assets in 2023. The agency has also hailed the big banks for being early adopters of fintech, saying the country’s lenders are on par with their counterparts in developed markets.
- Emerging Market currencies in aggregate are holding on to gains relative to the US dollar, a trend that also started in the last week of December 2023. Since December 27 last year, the US dollar spot index has strengthened by 2.3% and Emerging Market currencies in aggregate have strengthened by 1.5%. The ZAR exchange rate relative to the USD has, however, been weakening over that period of time and is now 2.2% weaker than its December 27 level. Domestic political and economic woes continue to keep the exchange rate at much weaker levels than our Investment Committee’s most recent fair value estimate of R17.65/USD would suggest.
- Naspers shares rose 4.5% driven by a perceived softening of gaming restrictions in China, a big piece of business for its biggest earner, Tencent. This week, gaming regulators in China took down draft rules to control spending on video games from its website, Reuters reports. Ninety One has made a case for investment in Tencent, estimating that it trades at a 50% discount due to poor sentiment towards Chinese stocks in general.
- Allan Gray has increased its stake in Pick n Pay to more than 10%, with some analysts saying this could be a sign the market sees its shares “bottoming out” after a recent slump. Pick n Pay’s shares rose 3.5% on the news.
- Pharmaceutical retailer Clicks reported almost 12% growth in interim retail sales as its namesake stores took market share across core product categories thanks to record festive season sales. The Tuesday update showed volume increases as well.
- Consumer goods group AVI saw its shares jump more than 8%, the most since September 2021, on Tuesday morning after it said it expects first-half profit to have risen as much as 18% despite many sector-wide challenges, including load-shedding and the costs that come with it to keep the businesses running.
- As at the time of writing the rand was 1.3% stronger and the ALSI was 2.8% up for the week.
Sources: Dynasty, TechCentral, Bloomberg, NYT, News24, BusinessLIVE, Daily Maverick, Reuters, CNN, etc.
