The shock and surprise for investors in 2024
PSG Wealth chief investment officer (CIO) Adriaan Pask says the South African market has been one of the most exciting parts of investment portfolios this year and looks quite promising—at least, for now.
This is because the year has been an outlier for investors.
It delivered not only a shocking election result in May, where the ANC government lost its majority for the first time since the dawn of democracy, but then went even further and delivered an even more surprising—and market-positive—formation of the Government of National Unity (GNU) afterwards.
Pask noted that election years are typically quieter for investors, with market activity slowing ahead of people heading to the polls.
Since many elections take place at the tail-end of the year, the shortened window for confident trading and investment usually results in subdued overall activity.
However, 2024 has been a clear outlier. It marked the best election year for the S&P 500 since the 1930s, with the index up 25% so far.
He added that this performance is striking, given the elevated valuations in certain securities and market segments, which made such a strong rally and sustained momentum seem unlikely.
For South Africa, specifically, many investors were planning for a neutral or negative outcome but were instead met with a shock and surprise result.
“Domestically, we anticipated a balanced election outcome, but the formation of a Government of National Unity (GNU), with multiple parties driving reform, was a major surprise,” said Pask.
“Even more unexpected was the smooth aftermath — no social unrest, no significant issues — and strong approval from international investors,” he added.
Follow the research
Pask said that against this backdrop, acting on research and investing in ‘out-of-favour areas’ requires courage but can yield significant returns.
“South African assets exemplify this principle, offering compelling opportunities despite current market sentiment,” he said.
PSG Wealth analysts interrogated the risks, potential consequences, and probabilities of various outcomes.
He said that they concluded that markets were likely overpricing bad news, and in the end, “not only was there no bad news, but there was also considerable good news.”
Pask said that this highlights two key lessons:
- The importance of following the research; and
- The value of diversification.
“South African assets have shown strong performance across the board,” said Pask.
He said that equities have posted solid returns, bond yields have fallen with long bonds, and listed property companies, while slow to recover from COVID losses, have performed well.
Banks and local retailers have also shown strong results.
For now
Despite the positive prospects now, Pask highlighted three key challenges ahead: rising global government debt, inflation, and inflated asset valuations.
He said that US government debt is a concern, as heavy borrowing against future growth risks escalating costs if expected growth does not materialise.
Persistent inflation is increasing government financing costs, with interest bills now exceeding $1 trillion, diverting funds from productive investments.
Additionally, market valuations in the US show signs of excessive speculation, fueled by retail investors, cryptocurrencies, and leveraged ETFs, suggesting an unsustainable surplus of speculative capital.
The PSG Wealth CIO said that many private equity firms with deep pockets now face significant reinvestment risk.
“As their earlier investments mature, they are pressured to deploy capital, often into lower-quality opportunities with near-term challenges,” said Pask.
“This cycle of forced reinvestment into suboptimal assets is a key concern moving forward,” he added.
Looking ahead to 2025
Overall, PSG Wealth sees South African equities as “a broad area of opportunity.”
“Currently, share prices are catching up to earnings after prolonged pressure, particularly within the banking sector, though not universally,” said Pask.
He added that the bond market also shows potential, with room for yields to drop.
But, much will depend on the February National Budget Speech to avoid unsettling rating agencies.
On the offshore front, the focus is on the US, though China presents opportunities with risk considerations.
The investment expert said that the UK, often overlooked, is expected to see a rebound as investors reassess valuations, potentially redirecting capital back from the US, creating new opportunities.
Less concerned than this time last year
Pask said that while risks remain, they have slowed, reducing the likelihood of negative outcomes.
Conditions have improved, with meaningful upside potential still available.
“Overall, we’re in a much better position, which is encouraging,” said the PSG Wealth CIO, adding that “the South African market is the most exciting part of the portfolio right now.”
The rand still has potential for recovery, and given the strength of the dollar, Pask said that investing offshore may seem less appealing in the short term, as a stronger rand could reduce returns.
“Patience will be key for offshore investments, but for now, South Africa offers a promising investment landscape,” said Pask.
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