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CIARAN RYAN: While there’s good reason to believe this year will be better for South African investors than last year, one thing is certain – volatility will remain a constant with elections around the corner and escalating geopolitical events such as Yemeni attacks in the Red Sea.
If volatility is our constant companion in the months ahead, how do we find peace of mind in a sometimes dangerous and unpredictable environment?
To answer that question, we’re joined by Adriaan Pask, chief investment officer at PSG Wealth. Hi Adriaan. Good to talk to you again. Are your current financial market expectations for this year different from those you had for 2023, and if so, how do you see things playing out differently this year?
ADRIAAN PASK: Hi Ciaran. Thanks for having me on the podcast, and hello to your listeners. Yes, I think there are elements that we can extrapolate from 2023 into 2024, but at the same time, we are most likely at the peak of interest rates globally and locally. As interest rates start to decline, I think quite a few things will change, and therefore our view has changed on certain things.
So I think, if we look at volatility, for example, it’s quite strange given all the recession fears last year. Volatility was high but not extraordinarily high, whereas I think this year could be a year where markets are quite volatile – currencies in particular.
I think what we also saw last year was indices moving higher on the equity markets, propelled by a handful of stocks – where I think we could see a reversal.
So essentially if we look at the number of stocks that are outperforming and doing well [these] should go up as conditions loosen and become easier.
But at the same time, there will be pockets of pain and disappointment, especially for the things that rallied quite hard last year.
Bonds and property could do well in an environment where interest rates are declining.
CIARAN RYAN: So there are a lot of moving parts to consider in the months ahead. There are elections in South Africa, and the US elections coming up in November. There are also uncertainties about the timing and the scale of interest rate cuts, as well as questions about corporate profitability. What are the key factors, in your opinion, to look out for in 2024?
ADRIAAN PASK: I think you’ve touched on quite a few important ones. From a volatility perspective, I think the elections will play an important role. Remember, a number of countries are voting this year; essentially 70% of the global population will have the opportunity to go to the ballot boxes. I think that can have a big impact.
There is a lot of awareness around politics at the moment, and with elections, the reason why markets are quite sensitive to this [relates to] any change in policy or reform. Therefore, policy changes may occur following a change in leadership. These changes may involve monetary and fiscal policy that is a little bit looser or tighter, which would alter the economic outlook.
Regrettably, we still have regional tensions and conflict areas as well. What concerns us here is that things can escalate quite quickly for a wide array of reasons.
This is something to keep in mind and prepare for from a portfolio construction point of view.
And then, as we’ve seen over the last few years, the outlook on inflation and interest rates is quite fluid. So it changes quite quickly, [as do] the nuances around it. The market tends to look at very short-term things. You’ll see commentary in the media around what’s going to happen at the March meeting, for example. The markets are looking at that, but in terms of expectations for the broader equity market to go up, as I mentioned.
Furthermore, we anticipate that interest rates will decline in the second quarter of this year, which will help the macroeconomic environment as well as profitability because costs – particularly finance costs – may decline. But then again, if we find something like a more conducive tax regime following a change in leadership on the political side, that could be quite supportive as well.
And then all of this is obviously impacted by sentiment, which in the short term is a key driver for where markets are going.
Then in terms of the expectations for the pockets of pain, it’s something that we spoke of before. We still think that the technology stocks seem to be pricing in too much growth, and we’ve now seen in some cases the results that have come out are not bad at all, but because they are undershooting expectations, the stocks are selling off. So I think that’s something that we can expect in the coming quarters as well.
CIARAN RYAN: All right. We’ve come through probably the most aggressive interest rate hike [cycle] in history and it seems to have done the trick in reining in inflation. Do you think we are likely to see an aggressive drop in interest rates, or is it going to be more of a softer landing in your opinion – and how would that impact the markets?
ADRIAAN PASK: I think interest rates are likely to come down a little bit slower than expected. Markets are thinking that the policymakers – especially in the US case – want to protect the economy and will therefore cut quite aggressively.
But I think there isn’t too much scope to cut rates aggressively.
I don’t think we’ll see the lows that we saw pre-2022, but there will be some relief. It’s all about managing expectations.
Interest rates will come down, but not as aggressively as some market participants are expecting at this stage.
CIARAN RYAN: Let’s turn to the Middle East, which is looking quite explosive. How has the Israel/Hamas conflict affected the geopolitical landscape – and what impact is that having on markets?
ADRIAAN PASK: I think it has obviously introduced a new layer of uncertainty in terms of the global economic prospects, and in particular markets that are affected by that region would naturally be oil. So that’s again something that we should keep in mind. But from our estimates, a crackdown on Iranian oil [exports] could almost instantly remove between one and two million barrels a day. Things like that will have an impact on oil prices and also the list of companies that operate in that environment.
CIARAN RYAN: Now, let’s shift a little closer to home. South Africans also go to the ballot boxes this year for a new National Assembly and provincial legislature. The polls are showing this could perhaps be the most significant election we’ve had in 30 years. Should the ANC be worried?
ADRIAAN PASK: Yes, I tend to agree. It’s a hugely important election this year. There’s a lot of political uncertainty. The way we read it, the most likely outcome is for an ANC-led coalition. Not a majority win, but a coalition environment.
I think the ANC should be worried. Their support base is not moving in the right direction.
So the loyal ANC voters are in the older age groups. However, we see the youth in particular being quite dissatisfied with the state of the country – things like poverty and job creation feature quite highly in there.
So I think they should certainly be worried about the depletion of the voter base. It seems they are aware of this, but they are unsure as to how to turn it around.
I think if we look at finances and municipalities, etc, it’s very difficult to continue spending to get yourself out of a slump. Most of these municipalities are heavily indebted, so they find themselves in a very tricky situation where things aren’t moving in the right direction.
CIARAN RYAN: Now of course one of the big chokeholds on the economy is Eskom and its load shedding. Have we seen the worst of load shedding?
ADRIAAN PASK: I think we have. That’s a huge positive for South Africans, not only from a personal perspective but also from an investment perspective. This has been something that’s weighed on the currency sentiment towards South Africa in general. We’ve seen a large withdrawal from our capital markets. So I think it’s a big positive.
The private sector has made huge strides to become less reliant on Eskom in particular.
I think we saw the costs in the income statements of these businesses, which had to incur huge investments just to ensure that they have a stable supply of energy so that they can conduct business. But the private sector, on the other side, is also investing quite a lot, and we still see more and more independent power producers (IPPs) come online – and the pipeline is still growing. So those things are hugely positive.
CIARAN RYAN: Right. Let’s wrap this up in a bow. What is the advice you give to investors for 2024, given all of these challenges that we’ve laid out – and indeed some positives that you’ve spoken about? How do we guide ourselves as investors going forward?
ADRIAAN PASK: I seem to get that kind of question quite often, and I always give a similar response, but it remains true.
There’s always a risk when it comes to investing. The best that we can do is to try and prepare for the known risks.
Some unknown risks and things will surprise us and, from that perspective, diversification just remains the best approach there.
In general, investors will just have to hang tight this year. It’s a very good year to be positive – especially in South Africa. We’ll see rate cuts, and we’ll see load shedding dissipating. So hang tight and be positive would be my advice.
CIARAN RYAN: Okay, we’re going to leave it there. Thanks very much, Adriaan Pask, chief investment officer at PSG Wealth.
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