Adriaan Pask – Chief Investment Officer at PSG Wealth – says that with interest rate cuts on the horizon, improvements in load shedding, and a recent uptick in commodity prices, it seems like we're transitioning into an environment that could favour a more positive outcome for South African equities.

The initial months of 2024 saw significant market volatility globally and in South Africa - fueled by escalating geopolitical tensions in Ukraine and the Middle East. In addition to this, the upcoming US and South African elections are adding additional uncertainty for international and local markets. Volatility appears entrenched, at least temporarily.

The effect of these jitters is evident in markets across the world, with global equities surging by 9.4% in dollar terms in Q1, contrasting with South African equities' 2.2% decline. Notably, global equities, excluding the US, saw a 4.8% increase in dollar terms, which dwindles to 1.3% in rand terms. The broader emerging markets category experienced a 1.1% decline in rand terms during the same period.

US growth also continues to surprise with robust growth of 3.4% over the period, which is reflected in its equity market performance.

Growth in other markets, however, has proven elusive as the impact of a volatile global economy is painfully apparent. European growth has stagnated at 0% over the last six months, with 13 European countries in a technical recession or on the brink. These countries include European economic powerhouses, Germany and France. The UK has also found itself in a technical recession.

And Asia isn't faring much better, with China inching along at 1% growth, and Japan recording a mere 0.1% growth at the latest reading. Considering this sluggish growth in the economies of some of our major trading partners, South Africa has narrowly skirted a technical recession – eking out a 10-basis-point increase in GDP growth last quarter, while grappling with sticky and unpredictable inflation.

In addition to the effect of a volatile international economy, one cannot underestimate the impact of elections on markets.

Historically, US markets tend to show subdued performance in the first two quarters of an election year, often remaining flat during this period. It's a trend that typically shifts post-election, with markets showing signs of recovery. However, this year has been surprising, as US markets have shown significant strength, catching many market observers off guard.

Another surprising phenomenon has been the large divergence between the performances of US mega-cap stocks. Nvidia for example is up 80% so far in 2024, while Tesla is down 31% over the same period. To this point, stretched valuations of some mega-caps inject additional volatility into the system.

Ultimately, we hold a pessimistic view on US stocks, which has been somewhat uncomfortable given the continued strong performance of the US economy. However, expectations for interest rate cuts have receded and comfort levels with our view have increased. At the start of the year, the consensus view was anticipating six cuts, making it challenging to be bearish in such an environment. Now the Federal Reserve foresees three rate cuts in 2024, which supports our thesis, along with the view that the full impact of high interest rates had yet to fully impact the US economy.

This has led us to maintain a positive outlook on emerging markets in the medium term.

In South Africa, we will have to get through the concerns around the upcoming elections in May before our markets will find sure footing. Foreign investor interest plays a pivotal role in our market performance, and currently, there's a cautious "wait and see" stance regarding capital allocation to South Africa.

The reality however is that elections come and go. With interest rate cuts on the horizon, improvements in load shedding, and a recent uptick in commodity prices, it seems like we're transitioning into an environment that could favour a more positive outcome for South African equities. There is room for cautious optimism.

We expect the announcement of interest rate cuts in the US at the 12 June meeting, with our Monetary Policy Committee meeting on July 18th. The upcoming quarter could therefore see stronger equity market performance in both the US and South Africa, setting the base for the rest of the year.