Financial Markets: What’s in store for 2024?

What’s the investment outlook for 2024? What can we expect from financial markets?

What’s the investment outlook for 2024? What can we expect from financial markets?

Published Jan 23, 2024


By: David Lerche

2023 has certainly been a year of unexpected trends shaping the global economic and investment landscape. It turned out to be a far better year for investors than most analysts had predicted, with the so-called Magnificent 7 mega-cap tech stocks dominating global equity market returns. South African markets fared less well, lagging their global counterparts significantly. After the surprises of 2023, what’s the investment outlook for 2024? What can we expect from financial markets?

With a myriad factors impacting reliable predictions, the unfolding of macro events and global trends often tends to surprise analysts. 2023 was no exception, again highlighting that no one can forecast consistently and accurately. Despite this, however, we should and do endeavour to understand the macro environment. While we should “expect the unexpected”, and historical patterns may not necessarily be repeated in a particular order, they can provide us with a sense of context regarding whether the prices of a wide range of assets appear reasonable or not.

Financial markets in 2024

In looking ahead to 2024, our starting point is understanding whether asset prices are currently high or low:

On the equity front, the MSCI World Index’s forward price-to-earnings ratio is a little more than 10% above its average for this century. At an index level, investors are not pricing in any sort of meaningful recession or drop in earnings, with forward estimates above their level at the beginning of the year. In our view, the market is priced for rates to come down in 2024. So while global equities appear slightly expensive, they are too close to “normal” to give any sort of clear signal.

In South Africa, the JSE is trading around 10% below its average multiple of trend earnings. Non-mining sectors are as cheap as they’ve been outside the financial crisis and Covid-19 market panics.

On a range of metrics, US equities look a bit expensive, while South African equities look rather cheap and European equities appear close to the middle.

Global bond yields are back to long-term norms but are still the highest they’ve been for many years. The real yields offered by US bonds of around 2% are the most attractive since before the financial crisis and prices therefore appear low.

Relative to equities, global bonds are definitely more attractively priced. The premium that investors in stocks are currently being paid for taking extra risk over bonds is the lowest in over 20 years.

At around an 11% yield, South African bonds offer encouraging real yields. Investors are being well paid for the risk associated with lending money to our government.

Taking the above into account, the balance of probabilities suggests that multi-asset portfolios should have mild tilts towards fixed income securities, and the stock selection within equity portfolios should be tilted defensively. Throughout 2023, we continued to add to global bonds in our multi-asset mandates as they offer encouraging prospective positive real returns.

Impact of rate hikes

The macro outlook for 2024, both globally and locally, remains subject to significant challenges, key among them the lagged impact of rate hikes. The market’s concerns around “higher-for-longer” interest rates abated in November, but we still see this as a material possibility. In our view, equity markets are priced for the combination of mild decreases in interest rates from mid-2024, but no material slowing in economic growth. Historically, this so-called soft landing scenario has seldom been achieved.

We remain concerned that the lagged impact of higher rates has yet to play through in economic activity in the US, although it is evident in Europe. Real rates only turned positive around the middle of 2023, so the effect of rate hikes will likely still be felt. The big question is whether the global economy will respond to higher rates in a similar manner to the past, just with a longer lag due to the higher proportion of fixed-rate mortgages and corporate debt, or whether central banks will for the first time engineer a major slowing of inflation without causing a recession.

Although we believe there is only a 30% chance of a US recession in 2024, this is still material. Typically, equity markets bottom out during recessions. So if there is one, returns may be low or negative.

On the local front

How do South African assets rank against this global backdrop? The ongoing problems with the state’s various organs continue to act as a clear drag on the economy. Load shedding should be less severe in 2024, easing some of the pressure on corporate profits. However, the mounting problems at Transnet are a distinct negative for both importers and exporters.

Unfortunately, the same impediments that have been at play for a number of years, including the decay of state-owned enterprises, poor execution across most government departments and corrupt government practices, all contribute to sluggish economic growth. This probably won’t change in the short term.

Both local and foreign market participants already know this and have priced it in. Global emerging market investors are far more focused on countries like India, where growth is likely to be higher than in South Africa. This means that local assets are quite attractively priced.

We also have an election looming in 2024. Typically, foreign investors prefer to sit on the sidelines ahead of elections in emerging markets. And this is the first election in 30 years where the outcome is not a foregone conclusion, so we would expect the returns from local assets to be weighted to the second half of the year.

A last word

It’s important to remember that while history often “rhymes”, as Mark Twain said, the future will have its own idiosyncrasies, as we’ve seen this year. However, our process and philosophy at Sanlam Private Wealth are focused on investing for the long term, with the aim of investing in shares that will consistently deliver returns above their cost of capital – at the right price.

In our view, there is always opportunity to find such businesses amid challenges – if one has the fortitude to look through the short-term noise, both positive and negative. And as always, efficient and appropriate diversification is crucial to ensure that our clients’ portfolios are in the best possible position to navigate macro uncertainty.

* Lerche is chief investment officer at Sanlam Private Wealth.