Momentum Investments has cautioned that the narrow-based advancement in the US equity market in 2023 has raised concerns about the sustainability of the upward trend into next year, adding that this might have an impact on South African financial markets.

In their financial market outlook for 2024 yesterday, Momentum said the likelihood of a US recession, the outcomes of myriad global elections including in the US, South Africa (SA), Taiwan, and actual or potential military conflicts around the world, were among the important financial market risks to monitor in 2024.

Momentum said uncertainties about geopolitics, US growth, inflation and policy rates were not reflected in low US equity volatility levels, potentially constraining future equity returns.

Momentum economist Sanisha Packirisamy said indications of slowing US economic activity in 2024, the world’s largest economy, with concomitant expectations at the time for the start of a US easing policy cycle subsequently, would provide some positive support to both the US bond and equity markets.

Packirisamy said although the likelihood of a US recession had seemingly diminished in recent months, it remains an important financial market risk to monitor going forward.

“More recently, favourable growth reports have also become bad news for the US equity market, with positive economic surprises driving more negative policy rate expectations rather than more constructive profit views for US equities,” she said.

“As such, any indication of slowing US economic activity in 2024 with concomitant expectations at the time for the start of a US easing policy cycle in the not-too-distant future would provide some positive support to both the US bond and equity markets.”

With geopolitical strife likely to remain high in coming years as deglobalisation continues and a multipolar world order establishes itself between the West and China, Momentum said gold was likely to maintain its strategic attractiveness in central bank and investment portfolios as a hedge against political volatility and uncertainty.

Packirisamy said gold also has a strategic rationale as a portfolio risk diversifier, because it was expected to hold its value through turbulent times and has limited correlation with other asset classes.

She said that for SA investors, Momentum preferred SA asset classes over global assets in the next year as they were supported by more attractive valuations than global assets and discount copious amounts of bad news.

Packirisamy said any improvement in global risk appetite during 2024 in the run up to future developed market policy rate declines, or better-than-expected outcomes on current local fundamental constraints, could unlock the valuation discount in SA assets.

In addition, Packirisamy said some rand appreciation associated with either of these outcomes would erode the local currency returns from global assets.

“It can be argued that the significant risk premium currently embedded in SA equity valuations is mostly self-inflicted through the continual deterioration of basic operational infrastructure in the SA economy over many years, particularly electricity unavailability and rail transport degradation,” Packirisamy said.

“However, it also implies that there is ample scope for a rerating in SA equities should there be an improvement in some of these constraints over time, as an ongoing dire scenario is already fully discounted. A rerating could also be on the cards should a global risk-on environment take hold.”

BUSINESS REPORT