Economic Overview March 2024

Feel free to reach out to PSG Wealth Manager Dawie Klopper directly.

The list is long, but all the items are somehow interrelated.

1.     False (inaccurate) information and disinformation

The thing with false information or half-truths, as well as disinformation, is that in a year when major parts of the world are going to the polls, this may have a bearing on election results. It may happen in different ways – for example, information about some of the respective parties might not be passed on to voters until the counting of the votes where results might be manipulated. This clearly poses a risk impacting confidence in particular.

Fake news about a company’s profits may mislead investors to believe the company has under- or outperformed significantly. Take Steinhoff as an example, whose reports included disinformation purporting to reflect excellent performance by the company. This convinced investors to buy the company’s shares – which, as we all know, ended in tears.

2.     Extreme weather conditions

Climate change and the accompanying global warming and rising ocean temperatures are causing droughts in certain areas of the world and too much rain in other areas. Calendar 2023 has already been identified as the warmest year on record (graph 1).

Graph 1: Global temperatures

Source: Statista

The thing is, at a micro level, it causes damage to crops and may even damage infrastructure, while at a macro level, it may lead to higher prices than would have been the case otherwise. And higher prices in turn lead to higher inflation, preventing interest rates from coming down.

3.     Cybersecurity

We are all aware of the risk cybersecurity poses. At a personal level, we are wary of cyber criminals accessing our bank accounts, and at a macro level, cyber criminals are able to penetrate corporate and government systems using ransomware to paralyse these systems and demanding huge ransom amounts to unlock them. Hence, we have decided to invest in the cybersecurity theme in our offshore portfolios. We bought into Fortinet, a cybersecurity company headquartered in Sunnyvale, California. The company develops and sells security solutions like firewalls, endpoint security and intrusion detection systems. Fortinet has offices around the globe.

4.     US inflation prospects

One of the most important factors that may impact markets in the next few months is inflation prospects in the US. Still sticky inflation is currently easing very slowly towards the 2% target level, which means interest rate cuts may occur later than expected. Especially the housing component is coming down slowly, keeping inflation high.

US Federal Reserve (Fed) chairman Jerome Powell confirmed that he still expected inflation to decline to the US central bank’s 2% target, with new data highlighting the bumpy road ahead while officials are debating the timing of interest rate cuts.

US inflation (headline personal consumption prices) rose to 2.5% in February, in line with expectations. This is slightly higher than the 2.4% for the 12 months to January 2024.

Graph 1: US consumer inflation

Source: Iress

5.     US interest rates

Lowering the fairly high interest rates has been hampered by high inflation levels to date. At the beginning of the year, up to six interest rate cuts were projected for 2024. Currently, the best estimate is three cuts. The stock market also responds to these numbers and although it made a strong start to 2024, it was somewhat muted by this new reality. The Fed might wait longer to cut rates, with a view to restoring confidence in the institution.

6.     Geopolitical developments

The Russia-Ukraine war is raging on, although it has somewhat dropped off the news radar after the Hamas-Israel conflict escalated into a war dominating the news headlines. In both wars, the destruction of infrastructure is extensive but the muted rise in oil prices suggests that the markets don’t expect either of the wars to spread. Putin warned that if NATO were to actively get involved in Ukraine, this would be the beginning of the Third World War. Israel recently attacked Iranian targets in Beirut, Lebanon, which caused the oil price to rise somewhat (graph 2).

Graph 2: Brent crude price

Source: iNet

7.     Elections worldwide… but also in the US and SA

This year, almost 60% of the global population are going to the polls. This may sound like democracy in action, but many of these elections won’t make any real difference to the circumstances of people in the relevant countries. In the US, things may be different – expectations are growing that Trump will be the winner. Biden may be too old to be elected for another term. The problem with Trump is that he is unpredictable, which creates uncertainty, and markets don’t like uncertainty. (Refer to point 11 for some thoughts on the SA election.)

8.     US economic growth

In 2023, a recession was widely expected for the US economy This was driven by an inverse yield curve, which has historically always led to a recession.

Graph 3: US yield curve (to March 2023)

Sources: iNet and PSG Pretoria East research

This didn’t happen, probably because of all the financial aid packages granted to US citizens. The aid packages supported the economy. However, most of this money appears to become depleted leading to questions about the power of economic growth in 2024. Prevailing low unemployment levels are supportive of the economy. The International Monetary Fund (IMF) expects the US economy to grow 1.9% in 2024, which is in fact quite a substantial growth number. The question is whether it will be enough to stimulate US company earnings growth, which is essential to support stock prices.

9.     China

China has been plagued by deflation, which makes it very difficult to boost economic growth. In fact, China has set a 5% growth target for 2024, which may prove quite challenging due to the property sector’s woes. Another risk is that Chinese deflation might be exported to the rest of the world.

10.     Commodity prices and the rand

Commodity prices have been on the decline for some time, reflecting the muted economic growth in China. These soft commodity prices caused the rand to weaken, but we should also take account of the strong correlation between commodity prices and the rand weakening over the last year. This may be ascribed to South Africa’s greylisting early last year, as well as the infrastructural issues currently experienced locally.

In addition, Government’s ideological positioning skewed towards totalitarian and socialistic countries is worrying – all of which are contributing factors towards a large-scale foreign selloff of South African stocks.

11.     SA election

In South Africa, it seems as if the ANC may lose its outright majority. Then the question arises: How far below the 50% level will ANC support drop? If it drops to below 45%, then we’re in for all sorts of coalition options. Of course, a coalition with the EFF or MK will be chaotic, and in the words of Allan Gray, South Africa will become uninvestable. On the other hand, a coalition with the DA may also be on the cards, which will generate a fair amount of optimism. However, I think there is a very high probability of a continuation of ANC rule, with the ANC securing support marginally below or above the 50% mark.

12.     Confidence

Confidence in the local economy remains fragile and will only improve when there is evident progress in the fight against corruption and state-owned entities are managed properly.

Graph 3: Business confidence

Source: BER

The lack of confidence leads to foreigners exiting South African investments in droves, and this is putting pressure on the economy and the JSE.

13.     SA economic growth

SA economic growth remains muted, mainly due to supply side issues. It is estimated that Transnet rail and port issues over the last two years cost the economy 6.5% growth in 2022 and 4.85% growth in 2023. Achieving that type of growth would have easily led to creating 2 million new jobs. Instead, the economy hardly advanced over the last few years (graph 4) and unemployment is at a totally unacceptable level above 30%.

Graph 4: Economic growth

14.     Stock markets

The current JSE valuation is at very low levels (graph 5).

Graph 5: JSE valuation

Source: Iress

The question is whether the JSE offers any buying opportunity at these levels, or whether it may be a value trap. In the next few months, a lot will depend on:

• The outcome of the elections
• The electricity crisis
• The water crisis in Gauteng, and
• The extent to which Transnet and the ports can be turned around.

Many of these challenges require privatisation and will keep struggling along until Government has an ideological wake-up moment.