A renewed sense of hope in SA

Feel free to reach out to PSG Wealth Manager  Herman Wheeler  directly.

Improved energy stability (Eskom), driven by investment in renewable sources and a more reliable power grid, further contributed to the country’s economic prospects.

The year in perspective

The US markets continued their rally with the S&P gaining 21% since the beginning of the year. Our own markets (JSE/ALSI) gained over 16% since the start of the year on the back of improved sentiment. High interest rates have dominated nearly every economy in the world and businesses and individual borrowers reliant on debt have been severely affected by the rating hiking cycle which started late 2021. This was good news for savers and bond investors who were getting higher returns on cash. Our prime lending rate has increased from 7,25% to 11,75% since 2021 (before the recent rate cut). It should be said that it appears that inflation in SA is now under control with the recently published CPI figure of 3,8%.

Newly sworn-in Cabinet ministers pose for a photo with Chief Justice Raymond Zondo and President Cyril Ramaphosa on 3 July 2024. Picture: GCIS|

The Fed In the US, the Federal Reserve (the Fed) has started the rate cutting cycle by cutting the rate by 50 basis points on 18 September. Our Reserve Bank has followed suit by cutting the prime lending rate with 25 basis points. The US is concerned that their economy will slow down with the risk of a recession on the cards and will probably cut rates again in November and continue next year. We expect their prime lending rate to be close to 3% by the end of next year (down from 5,5%).

In general, rate cuts in the US (and locally) are good news for equity markets as investors will look for more riskier assets as the yields on cash are not that attractive anymore. We expect the US dollar to lose of its shine with rate cuts. During times of a weak dollar emerging markets have always performed well and we expect the same again.

Furthermore, the Russia/Ukraine war is still ongoing, while Israel and the Lebanese militant group Hezbollah are now also involved in a full-scale war. The conflict between Hezbollah and Israel – both of whom have been exchanging fire across the border of Israel and Lebanon since the start of the war on Gaza last October – has descended into a “war”. This has impacted international trade, as well as energy prices and contributed to increased geopolitical risk in the world.

Lastly it has been a year of elections worldwide and locally, we have witnessed the formation of a Government of National Unity (GNU) on the back of the ANC

losing critical support to the new Zuma political party, uMkhonto weSizwe (MK). This has rekindled hope that the Government of National Unity could be a positive force in steering our country on a path of growth and accountability (Institute for Security Studies).

What investors can expect in the next three years:

It seems inflation in SA is under control as is the case in the US. We have seen the start of the rate cutting cycle and expect that to continue during the next year or two. This will likely impact positively on our own

equity markets as explained above. The rand is expected to strengthen with a weakening dollar and is currently significantly undervalued. If sentiment improves, the GNU’s starts delivering and our trade balance continues to improve, we can expect the Rand to strengthen.

In the US, equity markets continue to power ahead and deliver record highs. So far, 2024 has delivered one of the strongest starts to the year since 1928.

Excessive concentration levels in indices are a source of concern. The strong performance of the Magnificent 7 stocks has continued to be a driver of divergence between the performance of US markets and the remainder of the globe, despite bouts of volatility more recently.

In the meantime, the recent past tells a story of a growing US economy that has been carried by a healthy US consumer, which contributed more than two-thirds to US GDP. With this cyclically strong level of spending, we have seen corporate profit margins open, but we should be reminded that these margins are very likely to recede when the economic cycle turns. Profit margins are cyclical in nature and cannot grow indefinitely.

Even after the recent relief rally, the ratings of most South African equities still seem too low and do not provide a fair reflection of the current earnings or dividend yields. Not all SA investments are equally attractive and therefore selectivity remains key. We believe there is further scope for valuations to rebound if sentiment improves on the back of positive news flow.

We remind investors that in the decade prior to the last one, the offshore market posted negative returns, and we expect that the next decade will probably look different to the last one.

In Summary

Wall Street's main indices reached new highs on Wednesday (7 November) following Donald Trump's victory over Kamala Harris in the 2024 presidential election. The S&P 500 gained 2.50%, the Nasdaq climbed 2.90%, and the Dow Jones surged by 3.60 %, marking its best performance since 2022. Investor confidence has risen on expectations that Trump's second term will bring pro-business policies—such as tax cuts, deregulation, and tariffs—likely to drive economic growth and increase corporate profits. Leading the market rally were sectors expected to benefit most from these policies, including financials, energy, and industrials.

We believe South African assets remain attractively priced, while US markets and specifically pockets of it, remain expensive and selected other offshore markets are offering better prospective returns. However, investors will have to apply discretion when deciding on their asset allocation in their portfolio. Together, we will rebalance portfolios where necessary. It is not an environment where all assets are created equally, or where all assets will perform equally well. We expect volatility to remain a feature of the macro environment and so careful portfolio construction, and diversification will be needed.

At PSG Wealth Northcliff we are committed to provide you with independent and right advice and to navigate you as well as we can through your investment journey. Please talk to your adviser if you have any questions regarding this newsletter.

PSG Wealth Northcliff team