Highlights from the quarter
The US presidential election in November took centre stage this quarter. Polls suggested a tight race, but the resulting “Republican sweep” placed the US among a host of other countries, where incumbent parties lost support in 2024.
US equities rallied in response, while the dollar strengthened, reflecting the view that Trump’s policies (regarding tax and deregulation) should support US growth. Equity markets outside the US, including South Africa, came under pressure, on worries about US trade restrictions.
The deterioration in fiscal metrics in SA’s October MTBPS didn’t deter S&P Global from upgrading the country’s credit rating outlook to “positive” in November.
Markets
The South African equity market (FTSE/JSE Capped SWIX) fell modestly during in the fourth quarter (-2.1%) but ended the year with a gain of +13.4%. Financials and retailers were major contributors in 2024, benefitting from the improved SA outlook. Naspers was also a key contributor, while resources shares were the main detractors, particularly PGM counters and Sasol.
SA equities underperformed SA bonds for the year, with the All Bond Index delivering a solid +17.2% gain in 2024, despite the muted fourth quarter (+0.4%). Bonds have benefitted from disinflation, an inflection in the interest rate cycle and a narrowing in the SA risk premium. SA Listed Property (FTSE/JSE SAPY) was slightly down in Q4 (-0.8%), but still managed to end the year strongly (+29.0%).
The rand weakened almost 10% against the dollar in Q4, ending the year just shy of 19 R/$. Near-term fundamentals have shifted to being dollar positive given the recent US election result and the prospect of fewer Fed rate cuts going forward than initially expected.
Global equities tracked lower in dollars during Q4 (-1.0%) but were up strongly in rand terms (+8.4%). US equities rallied, while other major regions were mostly down, reflecting concerns that Trump policies may benefit the US at the expense of its trading partners.
The MSCI ACWI delivered a solid gain in 2024 (+21.2%) underpinned by AI-related US technology stocks and financials around the world. Global Bonds were flat for the year (+0.2%), while listed property delivered a modest gain (+4.4%).
Economy
The global economy is growing at a stable but underwhelming pace according to the IMF, which expects growth of 3.2% in both 2024 and 2025. The US has remained an outlier among developed economies, displaying resilient growth, in contrast to Europe which is growing at stall speed (0.8% in 2024).
India and China grew at a brisk pace in 2024 (7.0% and 4.8% respectively), lifting emerging economy growth, while South Africa grew an expected 1.1%, revised higher by the IMF during 2024.
Key risks to the global growth outlook include heightened policy uncertainty and trade restrictions as Trump takes office, the higher starting level of interest rates, ongoing geopolitical conflict, and the struggling domestic Chinese economy in the absence of more aggressive fiscal stimulus.
Inflation in the US and several other major countries (including Japan, Australia, Europe, UK, India and Brazil) remains above target, and monetary policy responses have therefore diverged. In contrast, inflation is well contained in SA with CPI printing below 3% for 2 consecutive months.
Despite sticky US inflation, the Fed opted to cut interest rates for a third consecutive time at its December meeting (100bp cumulatively thus far). Steady progress on the disinflation front was the primary driver as well as the emergence of some job market softness.
Fed messaging has turned more hawkish since, leading the market to temper expectations to perhaps just two cuts during 2025. A Fed pause is difficult to argue against given continued robust US GDP growth, and possible inflation from Trump’s tariffs.
The Repo rate in SA is currently 7.75%, following the SARB’s second 25bp cut at the November MPC meeting. This remains in restrictive territory compared to the SARB’s steady state neutral level of 7.0%, despite inflation being under control. For now, the market expects only one 25bp cut this year.
Portfolio Positioning
During the fourth quarter we trimmed our SA bond holdings across multi-asset portfolios, following a remarkably strong period of performance. The proceeds, plus some local and foreign cash, were allocated to global bonds and to a lesser extent SA equity.
SA nominal bonds have had an exceptional year driven by post-election optimism in SA and the outlook for lower rates. By the end of September, the All Bond Index had posted its strongest 12-month rally in over 20 years.
Although we remain more upbeat on SA than we have been for years, our sense is much of the good news is now embedded in bond yields. The 10-year benchmark bond yield is trading around 9%, having fallen significantly (from over 11% in 2023). As such, we currently prefer taking SA risk via the equity market, hence our current portfolio overweight to SA equity and underweight in SA bonds.
During the quarter we took advantage of the R/$ exchange rate in the 17’s by shifting some capital offshore. We increased foreign exposure by up-weighting global bonds for their diversification benefit and to guard against the risk of an unexpected growth scare. The 10-year US Treasury yield is currently trading at 2008-levels, and bond sentiment is extremely pessimistic.
In contrast, global equity is at multi-year high valuations, with sentiment (particularly US) looking frothy. We are therefore more comfortable being overweight global bonds versus global equity (which has remained neutral in our house view).
Indeed, the prospect of a widening US fiscal deficit, sticky inflation and a more hawkish Fed have not been helpful for bond yields in the short-term. Unless the Fed is forced to reverse pivot and start hiking again, we see little downside risk from here.
Outlook
Looking ahead, our current posture is constructive yet cautious. We are constructive because global economic growth, in large part due to the US, has held up despite the material shift higher in interest rates. That headwind is now becoming a tailwind, with rates having started to come down.
Our caution stems from the various economic and geopolitical cross currents. Global conflict and US policy changes have the potential to disrupt global trade, while the threat of inflationary pressures may delay further central bank easing. We would not be surprised to see a degree of financial market turbulence as markets digest these risks in 2025.
We have high conviction that our managers are well-placed to navigate the environment that lies ahead. Clients can rest assured our investment capability, championed by a diverse team of experts, is dedicated to carefully constructing and actively managing portfolios and ensuring we hold the right mix of managers.
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