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SIMON BROWN: I’m chatting now with Maarten Ackerman, Citadel chief economist and advisory partner. Maarten, appreciate the early morning. You put out late last week your investor outlook for 2024 and you titled it A Sense of Déjà Vu. As I was reading it, it did kind of feel much like where we were last year. There are some differences. Of course in 2022 we’d had a bear market in the US. Last year we had a roaring market. But a lot of what we would’ve been saying a year ago remains in force in January of ’24.
MAARTEN ACKERMAN: Yes. Morning, Simon. Thanks for the opportunity. If you think about the SA economy, we’re going to see a repeat of what we saw last year with all the structural issues. Maybe a little relief on the Eskom side with alternative energy coming on-line. But now we’re sitting with the issues with the ports. So yes, that’s more of the same.
Internationally I think the big thing was that most people last year expected, well, possibly a global recession. Given the strength in the US economy, I would argue that it has probably been delayed into 2024.
I don’t think we avoided the recession. But that’s why standing here today we basically say, well, there are a lot of global headwinds from an economic point of view. Add to that mix a lot of geopolitical turmoil and the view is pretty much the same as a year ago.
Now it’s just how markets will behave. Last year, like you said, I think markets surprised to the upside, especially on the offshore side with double digits in dollars. And I think where we are right now, the same view as last year – to be quite defensive and cautious – is going to be the view for 2024 as well.
SIMON BROWN: I want to come to cash and bonds in a moment, but let’s stay with markets quickly. We look at the markets and we look at the index returns. Of course, if we pull those apart, they really were driven by just a couple of stocks. And the broad market, for example the Russell 2000 and others, the S&P 493, didn’t have quite such a great year.
MAARTEN ACKERMAN: No, 100%. I think last year the whole thing about AI, artificial intelligence, that really underpinned what they call the ‘magnificent seven’ stocks – those were really behind those double-digit returns that we saw. If we exclude them, you are 100% right.
Then you are probably looking at a flat market, even some sectors down. So that was a very specific theme. Obviously artificial intelligence is part of the game going forward, so that’s not going to disappear. But I do think that equity-market or stock performance as a result of this theme playing out again are probably not going to be repeated this year.
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They’re coming off a very high base; so that tailwind has probably gone and is turning into a headwind.
Local markets – the JSE was also up about 10% in a very difficult year. So I think that should be a good number, given the environment. And going back to the first point, in this year fundamentally there are going to be a lot of challenges. So the JSE is going to tread water as well.
SIMON BROWN: And the point is it’s not to abandon equity – it’s always part of a long-term portfolio – but perhaps sort of to move weightings to more defensive stocks in that equity portion of the portfolio.
MAARTEN ACKERMAN: Yes, I think you’re 100% right. Equity is always part of your longer-term portfolio, so it’s basically tweaking your allocation. If you’re in a multi-asset kind of portfolio, right now we will be underweight equity. We will in the equity pot look at more defensive kind of strategies where there’s a little less sensitivity to high interest rates.
But you want to be there when that turnaround comes because you know that you can’t time the market perfectly. And as soon as central banks in the north start to cut rates sometime this year, that will probably coincide with a bottoming economic cycle and then the up leg will start again. So you want to have that exposure in your equity portfolio but now to be, like I’ve said, on the underweight side of the equation.
SIMON BROWN: And that then brings us to the cash and bonds, which are still – both in the US and locally – offering decent returns.
MAARTEN ACKERMAN: Yes. Fortunately, now we’ve an alternative. If it’s not even three years ago in an environment like this, what do you do if you want to risk in a risk-off environment? Where do you go, because we didn’t get anything from cash and bonds at the time? So that’s where people started getting clever on things like maybe gold exposure or managed volatility hedge funds. Now cash is back in the game and, like you’ve said, some decent returns.
If you think about SA, not even talking about the potential of rate cuts but just where we are today, in a proper SA income fund you can get somewhere between 9.5% and 10%. If you compare that to our inflation rate which is below 6% that’s a proper real return. Obviously you need to take tax into account on the interest. But if you make use of a tax-friendly product like a tax-free savings account or a retirement annuity, that’s a great opportunity which we haven’t seen in many years.
The same applies to the US or other international markets. There you could probably get close to 5% at the moment. Inflation is also under control. So yes, it’s a decent return altogether.
SIMON BROWN: Last question is the rand, and you’re looking for the rand somewhere between R18.50 and R20.50/dollar, with risk definitely to the upside on that call.
MAARTEN ACKERMAN: I think the rand is going to be under pressure. We’ve got all the geopolitical issues playing out. We’ve got a budget that’s under constraint. We’ve got the election this year. So in that environment the R18.50/R20.50 is our range. R20.50/dollar, even higher than that, is call it a risk-off environment where something goes wrong in the world – which I think with the geopolitics can quite easily happen.
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Then we first need to get all of these challenges out of the way before the rand can really start to breathe again. Maybe in the second half of this year, when the US starts to cut rates, [and we see] some dollar weakness and we’re getting through that economic bottom globally, then the rand might show stronger returns.
But for now we are preparing for a rand that will be under pressure – like you said, somewhere in the range of R18.50 to R20.50/dollar.
SIMON BROWN: We’ll leave it there. Maarten Ackerman is Citadel chief economist and advisory partner. Maarten, always appreciate the early morning.
