Navigating Global Challenges with a Data-Driven Approach

Navigating Global Challenges with a Data-Driven Approach
Bastian Teichgreeber, Chief Investment Officer at Prescient Investment Management

Bastian Teichgreeber, Chief Investment Officer at Prescient Investment Management Cape Town, 6 December 2023 – As the world grapples with rising global interest rates, increasing inflation, a potential United States economic slowdown, and geopolitical tensions in the Middle-East and Asia, the investment landscape is facing unprecedented challenges. Investors, particularly those in South Africa seeking hard-currency real returns, are urged to adopt a data-driven, scientific approach to navigate the complexities of the market in 2024 and beyond.

2024 and beyond will be materially different from 2023 and investors should focus on a data-driven, scientific approach – particularly if you are a South African looking to generate hard-currency real returns.

Consider for a moment that the JSE All Share Index kicked of 2023 trading at 74 436 and as we enter the last trading weeks of the year, the index is marginally lower. At the same time, you cast your eyes enviously to the US where the S&P500 has delivered a healthy 16% return in the calendar year and the average dividend yield is around 1.6%. In fact, the S&P500 has been a pretty safe bet for the last 5 years with an average return of just under 12% excluding dividends.

“Don’t bet against the US” has long been the refrain of legendary investor Warren Buffett and he has built significant wealth with this strategy for both himself and investors in Berkshire Hathaway. However if we unpack the 2023 performance on the S&P 500, the reality is that the outsized returns in the US have been driven by the so-called “Magnificent 7” – Apple, Alphabet, Microsoft, Amazon, Tesla, Nvidia and Meta which now make up 29% of the S&P500 and have delivered 70% in 2023 while the rest of index has delivered just 6%.

Is this sustainable going into 2024? 

In 2024, it is anticipated that inflation will decrease significantly compared to the levels observed in 2023. This decline in inflation is primarily attributed to improvements in global supply chains. As the economy enters its later stages, inflation driven by demand will respond to the Federal Reserve’s interest rate hikes, leading to a projected drop below 2% in 2024. Given the expectations of lower inflation and an economic cycle reaching its peak, it is likely that the Federal Reserve will make a strategic shift in monetary policy in the latter half of 2024. This shift could potentially serve as a catalyst for robust market returns, provided it does not coincide with a deeper growth recession – something which cannot completely be discounted.

Our in-house “nowcasting” consistently projects positive growth for the US in the upcoming months. However, it’s crucial to note that the US labour market is showing signs of significant slowing, which will inevitably translate into weaker economic growth. These trends can be challenging to reverse, often leading to self-reinforcing cycles. Every business cycle ultimately concludes with a recession, and the current one will be no exception.

To determine whether this will occur in early or late 2024, or potentially only in 2025, we will continue to closely monitor the data.

While the US inflation outlook presents the Federal Reserve with breathing room to cut interest rates, the big question mark will be whether the South African Reserve Bank (SARB) has the same latitude. Interest rates have been a policy tool to try and bring inflation under control domestically but at the same time has put a lot of pressure on the domestic consumer and asset prices. The SARB will face an interesting dilemma – even if it brings inflation under control, can it afford to cut interest rates at a time when capital outflows are a major worry for policy-makers and South Africa is expected to go through one of the most hotly-contested elections in its Democratic history?

While the Reserve Bank mandate has historically been around inflation targeting – rather than protecting the Rand – it would be prudent for South African investors to remember that the domestic market is very small in the global market and it would be prudent to hold a diversified global portfolio to hedge against currency volatility.

Will it be a prudent strategy to simply “bet on the US”? We believe you will need to be far more tactical in 2024 in terms of both geography and asset class and the more important question for investors to consider: “Do I have the skill, knowledge and resources to make informed decisions to build and protect my wealth in this uncertain climate?”

The future is uncertain and the limitations in accurately predicting it. In a world of constant volatility and ambiguity, discerning the path ahead can be a challenging endeavour.

The only way to gain insight into the future is by actively engaging with it. To attain a greater degree of certainty, it is imperative to consider a comprehensive view and this entails not only examining short-term scenarios, but also considering the long-term outlook for interest rates, inflation, and economic growth on both a global and local scale.

A data-driven, scientific approach has served us well through a variety of markets and trading conditions and we expect this to continue into the future.