Quite often we see negative or at best lacklustre investment returns after a very good year, and good returns after a bad year. This scenario played itself out over the last three years with 2020 starting bad but ending positive; then a very good 2021; followed by a very bad 2022; and then a good 2023. So now we have to predict what 2024 will produce.
If we agree that we can’t become fixated on trying to plan for the unknown, we can turn our attention to those things we do have some idea about. So, let’s list a few:
- Interest rates will come down during the year, which will be good for equities and bonds. What we don’t know is how much of the good news has already been discounted in the prices. We think that, although the expectation of lower interest rates has already manifested in better equities and bonds performances during 2023, the first actual cut in interest rates will still result in better returns for equities and bonds during 2024.
- The introduction of Artificial Intelligence (AI) during 2023 has catapulted the shares of some big technology companies, the Magnificent 7 group, in the USA higher. We think this drastic move higher will not be repeated in 2024, but what we don’t know is what the actual effect of the introduction of AI will have on the earnings of those companies. AI is an unknown, yet game-changing technology, and just like we didn’t really understand the impact of the internet on the profitability of companies all those years back, we will now have to wait and see what the actual impact of AI will be.
- Geopolitical tension is probably one of the most difficult things to quantify. The general belief now is that if the current conflicts in the Ukraine and Israel don’t escalate into broader regional instability, the effect on equities and bonds will not be negative. What we don’t know is what will happen between China and Taiwan. After the recent general elections in Taiwan, the outcome hasn’t escalated the political tension between the two countries, and neither China nor America wants a military intervention for now, but the future is unclear.
- China is the driver of emerging market performance, but the country is not in a good space when it comes to their economy. We have seen the Chinese equity market underperform the US market over the last 22 years, but what we don’t know is when this will turn around. For now, we can only hope that other emerging economies like India, Brazil, Vietnam and Indonesia will pick up the slack.
- South Africa has been underperforming the USA over the last decade. International investors have withdrawn billions of dollars out of our bonds and equities and our currency has weakened substantially. The biggest problem has been the inability of the government to make sound investment decisions for the country, resulting in collapsing infrastructure and bankrupt state-owned enterprises. What we do know is that the decade-long turmoil has left us with a lot of very cheap assets. What we don’t know is what will happen after the general election later this year. If the ANC loses its outright majority and can’t form a coalition with some dodgy smaller party, there might be a chance of a working coalition with the interests of the country at heart. Good for the rand, bonds, and equities.
- The general election in the USA will have a substantial impact on the world. It seems likely that Donald Trump will face off Joe Biden later this year. Trump is pro-USA business, anti-China, pro-Putin, anti-Ukraine funding and pro-wall-building to keep illegal migrants out. What we don’t know is what his policies will do to world trade and especially the relations between the West and BRICS.
- We know the debt in the USA is the highest it has ever been. If something should happen to the status of the US Dollar as the primary reserve currency for international trade, then we will see a rather nasty outcome for everyone.
Perhaps we should take advantage of the stellar year we had last year and make sure our portfolios are re-balanced for risk and return. Interest rates and bond yields still offer decent returns over the shorter term, so make sure they cover your potential shorter-term expenses. For the longer term we still believe that the volatility of our normal lives will not impact equities as the best-performing asset class over this period and that we have to stay invested.
