GOODBYE 2023, HELLO 2024 AND ALL THE CHALLENGES WE FACE GOING FORWARD

As much as things are different today, they remain the same as yesterday.

A very blessed 2024 to all our readers and investors.

Every year I try to reflect on the past year, and every year, I am amazed by the hype of the “old year” ending and the “new year” starting. It is as if some people expect to wake up on 1 January of a new year with all the worries, problems, and bad omens of the previous year magically disappearing and to start the year with a clean slate. New year resolutions are made, and the slogan “this year is going to be different” is slung around widely. It only takes a day or two for the new year celebration headache to ease to realise that nothing has changed.

Publications, articles and “market forecasters” share their wisdom freely on what the best investment solutions are for the coming year. Many publicists also indicate what you could have earned last year if you had the magical portfolio comprising of the best-performing shares of the past year, and return figures well above 100% are seen often. My request to them is, to please show me your investment portfolio so that we can see what your actual returns were. Quoting figures based on hindsight and available historical return data is both useless and very misleading. Using that information, anyone can put together the best-performing portfolio of the last 12 months.

Equally useless are adverts that proclaim that “manager X” was the best fund manager in 2023 or the “top SA manager”. One-year results are meaningless if the portfolio you invest in has a five-year+ investment objective. In most cases, the “best performance” for a particular year follows a very bad performance the previous year or years prior to the fund’s recovery. Starting from a low base makes exceptional returns much easier than starting from a higher base. Please do not fall into this trap!

If you invest in funds with three- or five-year investment objectives, judge the returns of the three- and five-year returns (preferably 10 years) and not the past 12-month returns. Consistency is much more valuable than erratic, sporadic “once-off” returns, especially when income is drawn from an investment.

So, with all the above said, who were the winners and losers of 2023 and previous years? The information provided is courtesy of PMX.

Since there is so much hype around global inflation and interest rate expectations, let’s start with bonds.

Global report: Returns are in USD

Bonds

From the above, we can see that global bonds have provided dismal returns over the past 10 years. With inflation increasing following the Covid recovery and the resultant aggressive interest rate hikes during 2023, bonds were volatile, and yields spiked. Remember, higher yields mean lower bond values. However, by investing in bonds, the yield that you “buy” is guaranteed. In other words, if you buy a bond with a 4.3% yield, you will receive 4.3% per year and receive your capital back on maturity.

Today, global bonds are much more appealing than they were two or more years ago! For many years, global bonds provided negative yields, which in simple terms, means that you paid the government to keep your investment “safe”. Global bonds were, therefore, largely excluded from global multi-asset portfolios for a long time. Corporate bonds and high-yield bonds were favoured albeit at a higher risk. Many portfolios replaced bonds with cash, even when cash also provided close to zero returns.

Expect to see much more global bonds included in multi-asset portfolios going forward. If and when developed countries start to reduce interest rates, bonds may just provide equity-type returns.

Equities

From the above, we can conclude that last year and, in fact, over the past 10 years, the US has led the global bunch. The strong performance of a handful of tech stocks made the US the clear winner. If you didn’t have US tech exposure last year or over the past 10 years, your returns would have been mediocre. In fact, were it not for the “Magnificent 7” tech companies that drove the S&P 500, Europe and Japan would have outperformed the US market in 2023.

That begs the question: where are the winners going to come from over the next five years? From a valuation perspective, Europe, the UK and Japan look interesting. The US and tech, in particular, look expensive. The trick will be to identify the future front-runner tech companies that are probably AI-focused if you believe the tech run will be sustained over the next five-plus years.

At current valuations, it is a tall order for these expensive companies to provide decent earnings to justify their prices. But we said the same in the past, and we were proven wrong. Irrespective of what technical analysis shows, human behaviour is unpredictable and at the end of the day, that is what drives demand and, ultimately, prices. Just be careful not to place too high a value on brand and promises of flamboyant CEOs …

The best strategy will still be to diversify between assets, asset classes and jurisdictions, especially if you are drawing an income from your investments. Restricting volatility is crucial and the enemy of an income portfolio.

Local report – returns are in rand

Unfortunately, the above results show that SA lagged the global developed markets as well as the global emerging market indices. Given our internal challenges, this was expected.

It is interesting to see that SA bonds have outperformed all local asset classes over most periods. From an income perspective, it always makes sense to have SA bond exposure in an income portfolio. The solid returns also show up in current annuity rates. It is not a bad strategy to consider converting some managed income portfolios to fixed or guaranteed annuity-linked solutions. Getting an annuity rate of 11% guaranteed for life is not bad …

What surprised some investors is the recent (short-term) strong performance of property. Local property and global property outstripped all other asset classes over the last month. I know one month is irrelevant, but trends do matter. Property is very interest rate sensitive and, in many ways, acts the same as longer-dated bonds. With the anticipation of interest rates reducing in 2024 and onwards, property may just surprise on the upside over the next three years. This is not a prediction, just something to think about.

The above figures also show that one does not have to take on unnecessary risks. The returns of the SA multi-asset sectors are a testament to this. Consider the returns of the low-equity sector (maximum 40% equities and 45% offshore, i.e. a conservative portfolio) versus the other asset class returns, it has performed admirably over all periods. Bear in mind the published returns are of the sector average, not the best returns. Now blend 30% with a pure offshore portfolio, and the returns are way ahead over all periods.

I want to caution you again, be careful of too much offshore exposure when you are drawing income, especially if you are drawing more than 8%. The increased volatility and heightened sequence of returns can cause havoc in income portfolios. Discuss strategic and tactical asset allocation with a suitably qualified financial planner.

Conclusion

At the start of 2023, there were many stories of doom and gloom. Nothing has changed. In fact, from a geopolitical perspective, things are worse today than a year ago. Even with all the bad news at the beginning of 2023, markets globally did pretty well, and with a reduced likelihood of a severe global recession, we may just be surprised again at the end of 2024 with higher-than-expected returns. If (when?) interest rates come down, all asset classes will benefit, and consumer disposable income will improve, which may also drive the equity market.

What can go wrong? Many things.

• Inflation can spike again (the current Red Sea scenario is not helping transport costs). This can cause a delay in interest rates being reduced, which will not bode well for bonds and other asset classes.

• Wars can escalate on various fronts. This applies to the Russian/Ukrainian war as well as the Israel/Hamas war. Suez Canal disruptions and the US getting involved with more conflict with Houthi/Iran can have far-reaching consequences and an effect on global markets.

• Politically, we are facing 2 important elections. Both SA and the US have scheduled elections, and regime change is possible in both countries. The outcome in the US is much more important from a global and geopolitical scenario but the SA election will have much more profound implications for South Africans.

Considering my last comments, I want to continue by saying, so what? None of the above scenarios justify not investing. Your investment strategy may change somewhat, but if your investment objective is long term, then nothing has to change. Be selective with the fund managers you use but don’t panic. Investing heavily in cash is not investing. All challenges provide different opportunities, as we have witnessed during all the crises over the past 50 years.

As much as things are different today, so they remain the same as yesterday.

Carry on investing, and a prosperous 2024 to all.