The rand could hit R20.50 to the dollar in 2024 – here’s how South Africans can benefit
Although 2024 has many risks, there are still many good investment opportunities for South Africans, including offshore assets that will benefit from the rand’s weakness.
In 2023, Citadel Wealth Management said that South Africa should expect strong headwinds for risky assets, such as the rand, amidst the themes of peak inflation, peak interest rates and the potential for a global recession.
The picture hasn’t changed much this year despite a few additional local and global risk factors in the mix.
“Last year took us by surprise as markets underestimated the resilience of the United States (US) economy. During the COVID-19 pandemic, US stimulus provided consumers with a savings buffer to weather the high-interest rates of 2023,” Chief Economist at Citadel Maarten Ackerman said.
“This, however, is going to change in 2024, and the impact of higher interest rates is going to be felt.” Although the US avoided a recession last year, Ackerman said this was likely just delayed.
Ackerman highlighted that South Africa faced significant challenges last year, including the poor performance of state-owned enterprises like Eskom and Transnet, and this year, it will likely stay the same, with further uncertainty caused by the national elections.
“Interestingly, on the investment front, 2023 proved to be positive for most asset classes which performed well. South African equities and bonds recorded solid returns returning around 10% each for the year,” he said.
“Offshore markets were even more robust. We saw strong double-digit returns from most global equity markets (with the MSCI AC World Index up more than 20%), and gold also printed solid returns. Dollar-exposed portfolios also benefitted from the rand slipping by 8% last year.”
2024 returns
Ackerman warned that investors need to adjust their outlook to have a more cautious approach, and, with good opportunities amidst high interest rates, investors could look to multiple asset classes for inflation-beating returns.
“Cash is currently offering very attractive interest rates. In South Africa, investors can probably look at returns of around 9%, beating inflation. Investors should, however, consider the tax implications and that a bigger allocation of cash makes more sense in tax-friendly products like retirement annuities and tax-free savings accounts,” he said.
“For offshore allocations, cash is currently giving attractive returns of around 4% to 5% in dollar terms, which we haven’t seen in a very long time.”
Local bonds are also offering attractive yields as markets are looking to be compensated for the implied risk of investing in South Africa due to the challenging fiscal environment.
The local bond market could get inflation-beating returns this year, whilst 10-year US Treasury yields can offer returns of between 4% and 5%, which could grow into the double digits due to capital gains if the US starts to cut interest rates.
The rand is also expected to remain under pressure, implying that offshore investments will benefit from the weaker local currency.
“Our medium-term view for the rand is that it will fluctuate between R18.50/$ and R20.50/$ with a lot of volatility. It may even go north of R20.50/$ if the global risk-off environment gains traction during the first half of 2024,” Ackerman said.
“For the rand to strengthen, South Africa needs to correct key structural issues, which we do not think will happen until late 2024.”
What to avoid
Global and local equity markets, coming off a strong 2023 base, will be sensitive to economic headwinds this year and should be part of an investor’s long-term strategy with a weighting to defensive companies.
“We must also remember that a lot of the returns seen in 2023 were driven by the theme of artificial intelligence (AI), here we talk about the magnificent seven companies: Apple, Microsoft, Alphabet (owner of Google), Amazon, Nvidia, Tesla and Meta.
“These companies were responsible for the majority of returns we have seen on the S&P 500 index last year. If these seven companies were excluded, equity performance for 2023 would look very different. We believe the momentum of the AI theme is going to soften in 2024, removing the tailwinds that it offered. We are anticipating low single-digit returns from both the local and global equity markets this year.”
“When considering returns, investors must factor in the tax implications of their investments as this could nullify some of their gains. Multi-asset funds, as well as tax-free savings and investment accounts, will protect investors from any immediate tax obligations.”
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