Economic woes leave financial advice pros feeling woozy
The heady cocktail of disinflation, interest rate cuts, elections and a multi-year slowdown in global economic growth will leave asset managers and financial advisers feeling a trifle woozy entering 2024. As things stand, the only thing that financial advice and investment professionals can ‘take to the bank’ this year is that the current mishmash of economic and political factors will contribute to financial market uncertainty.
Inflections and uncertainty
The topsy turvy nature of financial market returns were already on display in the final quarter of 2023 as US-based investors cottoned on that their economy may avoid the so-called hard-landing scenario, if entering recession at all.
“Last year can be best characterised as a year of inflections as the market view oscillated from a hard-landing scenario early on to a soft-landing scenario by year end,” said Mpho Molopyane, Chief Economist at Alexforbes. Expectations of an aggressive interest rate cutting cycle following the Q4 2024 US Federal Reserve ‘pivot’ added further support to both bonds and equities over November and December last year.
Alexforbes’ Economic Trends and Investment Themes for 2024 presentation opened with a review of key financial market influencers over the preceding 12-months. The firm noted that 2023 opened with bearish views for global growth; but by year-end, as economic data proved to be resilient, US growth forecasts were being upwardly revised for both 2023 and 2024. However, these upward revisions did little to assuage market analysts, many of whom are still peddling recession in the US and many Eurozone economies as their base case this year. Entering 2024, financial markets remained ‘on the fence’ with regards expectations of a US recession.
Molopyane quoted Jerome Powell, US Federal Reserve Chair, to illustrate the uncertainty that investment decision makers are navigating presently. Powell reportedly likened monetary policy decision making to “navigating by the stars under cloudy skies”. The challenge that central banks face in deciding on interest rates is made worse by dozens of national elections taking place this year, including in the US in November. “We could see major election upsets that would change geopolitical alliances and set the pace for overall geopolitical economic policy,” Molopyane said.
Some US-centred political musings
“How major?” you ask. Well, a couple of days prior the presentation, your writer chanced upon some US-centric political commentary by Mergence Investment Managers. Referring to the then-recent Iowa Republican presidential caucuses, the firm noted that a Donald Trump nomination as the Republican presidential candidate was “highly likely”. After some back-and-forth on approval ratings for Biden versus Trump, the manager warned that the mere threat of “a second Trump presidency could see more extreme policy shifts from the Biden administration, and more deadlock on political issues that require bipartisan cooperation”. This could affect the US economy; impact US-China relations; and have implications for emerging markets and commodity prices.
Global growth for 2024 is forecast to extend its two-year-long slowing trend, though there will be the usual mix of laggards and leaders. “Growth in the US and the Eurozone area, including the United Kingdom, is expected to slow; but over the long-term growth is expected to revert back to the pre-COVID average in these regions,” Molopyane said. It turns out China is the laggard in this scenario, and the world’s second largest economy faces ongoing constraints due to its ageing population; the reduced capacity for its government to increase fiscal expenditure; and the well-documented property market meltdown.
Offering up one of those confusing spaghetti graphs of multi-economy inflation rates as proof, Alexforbes observed that the current disinflation trend would continue over the coming 12-months. “Inflation decelerated quite significantly in 2023, and while we expect that trend to continue into 2024, we think the pace of decrease will slow from here on,” Molopyane said. The caveat is that inflation could skyrocket if the Hamas-Israel conflict and (or) Houthis attacks on Red Sea merchant cargo ships spill over into a wider Middle East conflict. Widespread conflict in this region would reignite inflation and stymie economic growth, leading to a stagflation scenario.
Dashing the hopes of the ‘cut by March’ crowd
Finally, the discussion turned to interest rates, and the rather gloomy news that many developed market central banks would delay until mid-year before cutting same.
“As inflation edges closer to central banks’ targets, we do expect that they will be able to cut policy rates and begin the journey to normalise real rates,” Molopyane said. “But there is definitely room for disappointment in terms of what the market has priced”. The bottom line is that central banks are holding off on interest rate cuts until the data supports that inflation is fully under control. Those who thought the US Fed would cut in March and then cut five more times over the year can expect fewer cuts, beginning in June or July.
Alexforbes’ chief economist said that the US financial markets were pricing for around 150 basis points worth of cuts this year versus a more realistic scenario of 75 basis points. “The markets also think that the pace of cuts is going to be fast, ending already in 2026, whereas the US Fed thinks that the easing cycle is likely to be a lot more gradual,” she said. It seems, therefore, that central banks have heeded the International Monetary Fund’s (IMF) recent warning against premature celebrations in the fight against inflation. The IMF’s plea was for high conviction on inflation trends before central banks pulled the rate cut ‘trigger’.
As for South Africa, the presentation led with a slide titled ‘SA economy is limping along’. The country’s real GDP growth remains stuck well below the 3.6% average achieved between 1994 and 2006, and even lags the 1.6% average achieved in the decade pre-COVID, starting 2010. “Overall, we do think that easing loadshedding intensity; improvements in self-generation; and the gradual improvement in fixed investment will provide a boost to domestic economic growth,” Alexforbes said. But the numbers that popped up on screen were a miserable 0.6% for 2023; 1.2% in the current year; and 1.5% in 2025.
Elections promise bucketloads of uncertainty
Recent opinion polls hint at significant uncertainty around the outcome of South Africa’s 2024 National Elections. An election upset in which the ruling African National Congress (ANC) secures less than 50% of the vote would leave parties scrambling to figure out post-election political alliances, perhaps forming loose coalitions to govern. Outcomes will vary based on the makeup of these alliances: ANC plus smaller parties will extend the status quo, delivering market-neutral outcomes; ANC plus DA will lead to market friendly policies; and ANC plus EFF will lead to increased fiscal spending and the accompanying risks to the country’s sovereign credit risk.
The SA inflation outlook is more benign and is forecast to remain within the South African Reserve Bank (SARB) 3% to 6% target range this year. This will give the SARB space to ease interest rates, but only after the US Fed moves. Molopyane concluded that well-diversified portfolios were essential to insulate investors from the economic, geopolitical and monetary policy uncertainty that 2024 heralded. “Our expectations for a soft-landing in the US and interest rates to ease in the second half of the year point to a favourable backdrop for both bonds and equities,” she said.
Writer’s thoughts:
The news feeds are awash with economic outlook presentations at present, containing countless guesses at how soon and how aggressively central banks will cut interest rates. What are you telling your clients to expect from the SARB this year, and do you agree with Alexforbes’ pro bonds and equity view? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
