There’s a growing consensus among investment experts that, globally at any rate, the markets are looking less constrained going into 2024. What happens locally is another matter, given South Africa’s unique economic and political challenges.
Importantly, the US Federal Reserve’s rate-rising cycle, which began last year and which has been among the steepest in recent history, appears to be at an end.
Izak Odendaal, chief investment strategist at Old Mutual Wealth, whose weekly Investment Note is a worthwhile read for anyone needing a weekly refresher on market activity, said that, with inflation moving in the right direction, there is no reason to expect any further substantial tightening of monetary policy.
“It seems increasingly likely that the US Fed will not raise rates any further, given the improved labour market balance and easing inflationary pressures. This matters because the US Fed is the most influential central bank in the world, as its interest-rate decisions reverberate into all corners of global markets,” Odendaal said.
Casey Delport, investment analyst at Anchor Capital, was also positive, but sounded a note of caution in her coffee-table economics report last week. She said the US Fed might even begin cutting rates from the second quarter next year, following data showing that US consumer inflation had slowed to a “cooler-than-expected” 3.2% year-on-year.
“Financial markets across the globe are now pricing in that the US central bank is done with its fastest rate-hiking cycle in a generation. However, Fed Chair Jerome Powell and his colleagues will undoubtedly wait before declaring any concrete victory. Outside of a big risk-off event, we are likely entering a gradual rate-cutting cycle of US interest rates as the Fed continues to doggedly strive towards reaching the goal of inflation anchoring at around 2%. Still, at the end of the day, one positive inflation print does not equate to a total victory – as much as markets may be feeling otherwise,” Delport said.
While markets, which are forward looking, may have cause for optimism, there is still the question of the current effect of the high interest rates on the economy. Some economists believe a US recession, or what they term a “hard landing”, is still on the cards. There certainly has been a “deceleration of growth”, an intended consequence of the rate hikes, as shown in the cooler US labour market data, but a full-blown recession seems increasingly unlikely.
Odendaal said the resilience of the US economy has been noteworthy. “Expansionary government spending helps, as does the fact that most mortgages and many business loans have fixed interest rates that shield these borrowers from the pain of higher rates.
“At the margin, economic activity will slow as big-ticket spending is postponed or cancelled because of unaffordable borrowing costs. But with existing borrowers largely unaffected, the US economy had a very good year. Importantly, overall household and corporate balance sheets were in pretty good shape before rates started going up. While consumer spending, the biggest component of the US economy, is likely to slow heading into 2024, it is therefore unlikely to collapse,” he said.
In South Africa, the outlook for 2024 is less predictable regarding interest rate hikes, the state of the economy and, dare I put it out there, the post-election political milieu.
Despite the relentless media reports about government ineptitude and corruption affecting almost every facet of public life, a lull in load shedding brought the financial optimists out in full force, assuring investors that things were looking up.
But the energy reprieve was just temporary, as we discovered to our horror this week. No amount of positive talk about private-sector involvement in the energy supply will convince me that we can get by without a fully functional national grid. That and the disaster that is Transnet are devastating the economy more than most commentators are prepared to let on, in my view.
Last week, the South African Reserve Bank’s Monetary Policy Committee left the repo rate unchanged at 8.25%, despite a recent uptick in inflation to 5.9% in October. The Reserve Bank said it expects inflation to average 5.8% this year, decreasing to 5% next year and 4.5% in 2025.
But that announcement did not factor in the latest load shedding onslaught, which took us back to Stage 6.
Pick n Pay, Shoprite and Spar are spending billions on diesel to keep their tills operating and their perishable goods refrigerated. That is bound to push up food-price inflation, which at around 10% is almost double the CPI figure.
To add to our economic woes, one of our biggest car producers, Volkswagen South Africa, which employs thousands of workers in the economically enfeebled Eastern Cape, has started making ominous noises about packing up and leaving if it ceases to be competitive. Just like General Motors did in 2017.
And then there’s the distinct possibility of an anti-democratic, left-wing coalition governing our country by the end of 2024. Why so little on that from our financial commentators? Or is the scenario so ghastly for the business sector to contemplate that everyone is acting like an indigenous flightless bird originally farmed for its feathers (until the bottom dropped out of the market)?
* Hesse is the former editor of Personal Finance.