By: Reza Hendrickse, Portfolio Manager, PPS Investments

PPS Investment Perspectives – Economic Performance in Q4 2023

The final quarter of 2023 saw high geopolitical tensions emanating from the war in Gaza, stoking fears of broader contagion amid the humanitarian crisis with South Africa charging Israel with genocide at the International Court of Justice in The Hague.

While loadshedding eased over December, with Kusile Unit 5 coming back online at year-end, record-high “out of service” levels saw loadshedding swiftly resume in the first week of January however, despite very low demand at the time.

The pace of global economic growth is currently below average, with the IMF projecting 3.0% for 2023 (and 2.9% in 2024), with US resilience compensating for weakness in Europe. High inflation has proven transitory after all and has been falling rapidly in most countries, prompting the much-anticipated Fed “pivot” at the end of the quarter.

In December, Federal Reserve Chairman, Jerome Powell, capitulated by announcing that further rate hikes no longer seemed necessary. The market’s interpretation of this and based on the Fed’s summary of economic projections is that the interest rate cycle has peaked, and we can expect cuts later in 2024. This is potentially the cue for other central banks to become more dovish as 2024 unfolds.

The prospect of monetary policy becoming less restrictive is welcome, alleviating fears of a potential significant slowdown in economic growth. Fear of a US recession was elevated in 2023, with leading indicators suggesting a contraction. Signs, such as the inverted US yield curve, are still present but unlike in previous cycles, might be less reliable in the context of the recent years’ economic shocks.

Outside of the brief US banking crisis scare in March, and intermittent Chinese property market concerns, economies, by and large, appear to have taken higher rates in their stride. The macro backdrop was supported by fiscal stimulus from some policymakers, while consumers in the US have benefitted from having previously fixed their mortgages at low levels. On the surface, it appears economies might now be better equipped to withstand more normal levels of interest compared to the last decade.

The IMF expects South African economic growth of 0.9% in 2023 to accelerate to 1.8% in 2024. Loadshedding has been a major headwind for growth, but this is expected to pose less of a burden going forward, with many consumers and businesses having taken measures to reduce their reliance on Eskom. Transnet is another State-Owned Entity undermining economic growth, given the state of the freight rail and ports networks on which our exports are heavily reliant.

In keeping with the global trend, domestic inflation moderated to 5.5% at the end of November, from 6.9% in January. Reuters polls predict continued disinflation over 2024, with CPI ending the year at 4.6%, fractionally above the SARB’s targeted level. The Repo Policy Rate is expected to decline from 8.25% at present to around 7.5% by year-end, still 0.5% above the SARB’s steady state neutral level, and therefore arguably still mildly restrictive.

Looking Ahead

Looking ahead, we expect some surprises to no doubt materialise in 2024, but we are confident that the portfolios are well-positioned. Last year was a reasonable year for absolute returns across the range, despite SA equity disappointing and the foreign equity market having been narrowly driven. Relative performance lagged in some areas, where portfolios or their underlying managers were defensively positioned, but solutions remain robust.

We remain wary of placing too much reliance on our ability to forecast the macro-outlook. Most expected economic pain in 2023, however, this failed to play out, with disinflation and desynchronisation being the more dominant themes. This year, interest rate policy normalisation could become the main theme, which could prove bullish for markets. For now, it remains to be seen whether the Fed has indeed, against all odds, managed to engineer a soft landing, and how much of this is already priced in.