2023 will be defined as the year where predominantly negative global economic expectations never materialised and most stock market analysts and economist forecasters were proved wrong.
All eyes were on the impact the steep rise in interest rates would have on the global economy, with recession seen as an inevitable outcome. With equity markets already looking expensive in some jurisdictions, especially the US, stocks were largely expected to come off sharply during the year.
Instead, the US economy proved remarkably robust, which meant the Federal Reserve kept interest rates at their prevailing highs. Ever-optimistic interest rate expectations saw the benchmark S&P500 and Nasdaq indices ending the year 24% and 44% higher respectively.
SA faced a myriad of obstacles
SA had a far more trying year as loadshedding escalated further and logistical constraints weighed heavily on the economy. As a result, SA equities lagged their emerging market counterparts and delivered significantly lower returns than most developed markets. The All Share Index finished the year less than 1% higher and the All Share Top 40 Index 3.5% ahead for the year.
What lies ahead for 2024?
As we head into 2024, all eyes will remain on how soon central banks begin reducing interest rates in SA and abroad and whether the stock markets still have further upside to explore. SA investor expectations are far less optimistic than their global counterparts:
- SA versus US interest rate outlook In SA, the Reserve Bank remains firmly committed to bringing inflation down to the middle of its 3% to 6% target range, a feat that is only expected to be achieved in 2025. A Reuters poll indicates that economists expect the repo rate to be cut by 25 basis points in July or September next year and then by the same amount again in November.
In the US, investors are more than twice as optimistic as the Fed, expecting the US central bank to reduce interest rates as many as seven times during the year – compared with the three cuts indicated by the Fed’s guidance. A first rate cut is broadly anticipated to occur in May 2024.
- SA versus US equity market outlook Uncertainty around the outcome of the upcoming SA general election looks set to bedevil stock markets this year. Though the date hasn’t been set, economists and analysts say the prospect of the ANC losing its 50% majority and teaming up with the EFF could unnerve local and foreign equity investors and introduce significant volatility. There’s also a chance, of course, that the election results could spur unexpected growth.
In contrast, the US equity market is expected to continue gaining ground as long as optimistic interest rate expectations prove justified. A positive sign is that it’s not just the so-called Magnificent Seven technology companies that are performing well. According to Morningstar, the Magnificent Seven accounted for 75% of the US stock market’s return at the end of June, but by December 21, their contribution had declined to just 52%.
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