As long-term valuation-based investors, it is no surprise that we still find opportunities at a stock-specific level despite broader economic and fiscal challenges. With a disciplined approach to investing that focuses on stock selection and valuation, diversification is paramount.

Our globally integrated investment expertise and wealth management advice remains a combination to rely on in the year ahead, despite macro, geopolitical and market uncertainty. We are here to guide you, ensuring your portfolios adapt to changing scenarios, and to help you make informed decisions in the ever-evolving market terrain.
 

International market review.

The third quarter of 2023, despite a good start, was a difficult one for markets overall.

This was primarily due to a significant increase in government bond yields. Moves in bond yields impact most financial assets as investors attempt to value investments through present valuing future cash flow streams. And if the discount rate (government bond yield) moves higher the present value of those cashflows declines.
 

Why did bond yields increase during the third quarter despite a general picture of slowing inflation?

1. Firstly, the Bank of Japan surprised the markets by modifying part of its monetary policy, this change was seen as a step towards policy normalisation / tightening and resulted in higher Japanese government bond yields.
   
   
2. Secondly, the downgrade of the US government credit rating from AAA to AA+ (by Fitch Ratings), expectations of higher future US bond issuance and political gridlock that almost caused a US government shutdown.
   
   
3. Thirdly, the concern that rising oil prices, due to restrictions in output by Saudi Arabia and Russia, will feed into future headline inflation numbers.
   
   
4. Finally, and perhaps most importantly, central bank rhetoric and forward guidance led to a broader realisation by markets that, while most central banks are close to finishing raising rates, interest rates will stay higher for longer. Markets repriced accordingly.

There were concerns about China’s property sector and China’s economic recovery

This was after fears that Country Garden, one of Chinese largest property developers, would default on some of its debt. China’s property market has struggled ever since Evergrande defaulted in 2021, after years of speculation and over-investment. Related to this, worries around China’s lacklustre economic recovery since the economy reopened and a lack of sufficient government stimulus remained in focus.

European economic data was weak, energy prices rose, and US economic data was weaker. This led to stagflation concerns in Europe, and an inflationary outlook.
 

South African market review.

Factors that affected markets in the third quarter

Despite local challenges, South African assets benefited from emerging market gains during July.

The government announcement that Russian President Putin wouldn’t attend the BRICS summit removed uncertainty and had a positive impact on local markets. Loadshedding challenges intensified in July, which reversed June’s reprieve and the reduced energy availability posed a challenge for local markets despite partial relief from the Kusile Power Station unit coming online. In addition, several economic gauges pointed to weak domestic demand, moderating external demand and weak tax receipts from corporates in particular affected markets.
 

Key outcomes from the BRICS Summit

Six additional countries (Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates) have been invited to become members of BRICS. Agreements were made to improve access and trading terms for specific sectors, and South Africa received a R500 million grant and R167 million worth of power equipment from China to help with the current energy crises. Also noteworthy from the Summit was a loan agreement with the BRICS New Development Bank (NDB) to fund a further phase of the Lesotho Highlands Water Project.

Operation Vulindlela announced a progress report with key milestones for the second quarter

The joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms and support economic recovery, called Operation Vulindlela, released a progress report for the second quarter, including milestones for reforms in key areas such as telecommunications, the visa system, logistics, water, and energy.

In September, domestic assets declined due to a persistent risk-off sentiment.

 

Looking ahead: macro-economic outlook
 

1. Global GDP growth and South Africa’s economic resilience

Despite various factors contributing to a more modest slowdown in global growth in 2023, risks linger for 2024. Tighter financial conditions, effects of the banking crises in the US and Europe, and a potential slowdown in services against subdued manufacturing pose threats. Geopolitical tensions, such as the Russia-Ukraine war, add further uncertainty.

Reforms are required to return the South African economy to growth and restore confidence

South Africa has shown remarkable resilience amid challenges like loadshedding, logistics constraints and natural disasters. Local growth prospects align with the global economic moderation. Investing in energy transition and logistics holds potential, while meaningful reforms could counter the trend of slowing growth. However, Eskom's energy crisis remains a significant risk and binding constraint, while the challenges at Transnet have intensified.
 

2. Inflationary outlook and monetary policy

Data suggests that producer and consumer prices have peaked, although risks to the inflation outlook remain and inflation is likely to remain above the midpoint in the near term. The SARB has acknowledged recent downward trends in inflation, however, still view the risks to inflation to the upside. Loadshedding, a volatile rand, energy prices (oil price) and upcoming El Niño conditions adds further risk to the inflation outlook, especially for food inflation.

The SARB acted decisively in 2023 to anchor inflation expectations and address rising prices

While risks to the inflation outlook are still assessed to be to the upside, we should be at or close to a turning point for this cycle.  We still expect the SARB to be data dependent and believe the door remains open to more hikes until they are satisfied with the data coming through. Having said that, we do concur with market pricing that interest rate cuts will be forthcoming in the next 12 months.
 

3. Rand/US dollar

After a period of strength, the current account balance is back in deficit

Terms of trade has moderated as commodity prices subsided and will provide less support going forward. While the country will move to twin deficits again his year, the magnitude and therefore vulnerability from these funding needs are less than in the past.

Given fiscal challenges, however, the forward-looking trajectory faces more meaningful risk of deterioration. Loadshedding has diminished growth prospects and with it, the appeal of investment in the country.

This, in addition to the impact of grey listing, has seen foreign inflows into equity and bond markets weak and declining. As an emerging market country with specific risks, the rand will remain vulnerable to volatility and global risks.

How are our Nedbank Private Wealth portfolios positioned*?

Overall, portfolios have remained balanced with a tilt to risk assets, after recent portfolio actions.

We are still overweight on equities but will be keenly watching incoming data given the potential for a greater range of scenarios to play out from here in the medium term and will be assessing portfolio positioning and risk in that context. This includes the progression of the interest rate cycle and loadshedding locally.

Equities Our overweight positioning reflects attractive valuations that are near historic levels, with the market pricing for a challenged backdrop. Risk remains plentiful and as such we have been nimble, focused on risk management and stock selection.

Bonds We have an overweight position, with additions to positioning on extreme valuation events. Starting valuations matter and we account for both the interest rate cycle and an adverse fiscal backdrop to recalibrate our positioning and assessment of fair value.

Preference Shares Holding for diversification and income.

Property We have seen a continued improvement in fundamentals, but headwinds continue to cloud the investment thesis.

Cash Neutral. We have raised cash throughout the year and see this as a source of optionality.

*At the time of writing at the end of November 2023

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