Chief Investment Officer Duane Gilbert shares a cautiously optimistic outlook for HY2 2024, highlighting opportunities amid a potential mild US recession and China's low growth trajectory. With a tactical overweight to defensive US equities and a high allocation to global bonds, the strategy aims to hedge against volatility while keeping dry powder ready for market bargains.
Global Markets
The risk-on rally continued in May as financial markets increasingly expect the US to avoid a recession in 2024 (the “soft-landing” scenario). Both equities and bonds rallied throughout the month. US equities ended the month up 4.78%, European equities up 5.03%, Japanese equities up 1.35% and emerging markets up 0.56%.
The US dollar continued its two-month downward trajectory as expectations for US rate cuts, on the back of a strong economy, continued to be brought forward. Expectations of falling interest rates also caused growth stocks (large cap tech in particular) to outperform value.
Chart 1: US Dollar Index (Source: Trading Economics)
Supporting this exuberance was strong economic data out of Europe. The Euro Area services PMI came in above 50 (expansionary) for the 3rd consecutive month. And their GDP print for Q1 2024 came in at 0.3% quarter-on-quarter, after 5 consecutive quarters of flat to negative growth.
The gold price also pushed higher in May. For months it has been perplexing how the gold price has rose despite persistent high interest rates. With hindsight, it is now clear that the gold price has been driven by central bank buying (China in particular) as central banks not aligned with the United States are pushing away from the dollar after seeing the impact that US sanctions had on Russia.
Chart 2: Central Bank Gold Purchases (Source: Alpine Research)
While recent growth numbers out of China have also beat expectations (which have been a tailwind for Chinese equities), growth remains below trend due to demographic challenges and, more importantly, high levels of consumer debt.
Chart 3: Chinese Growth is below trend and underperforming Asian Peers
Local Markets
Local markets were dominated by the national elections which were held on 29 May. Local markets were generally weaker than global markets as investors grew nervous about a “bad election outcome”. Local equities ended the month up 1.0%. The Resources 10 Index ended the month up 0.3% and the Industrial 25 Index ended the month up 1.7% - largely due to their rand hedge counters, while the domestic focused Financials 15 index ended the month down 0.4%. The poor performance of domestic counters also highlights how global positivity is not finding its way into emerging markets. The JSE All Bond Composite gained 0.8% for the month while the inflation-linked bond composite ended the month down 0.8%.
In economic news, SA Q1 2024 GDP came in at -0.1% quarter-on-quarter, with all sectors flat to negative besides the agricultural sector
Chart: SA GDP QoQ (LHS) and sector contribution to GDP (RHS) (Source: Stats SA)
Chief Investment Officer, Duane Gilbert’s Commentary
Our market outlook for HY2 2024 is more bullish than it was in 2023. Falling inflation will give the Federal Reserve scope to cut interest rates, which will be supportive of equity markets (and bond markets to a lesser degree). However, we should not forget that the recent interest rate hiking cycle was the most aggressive in 40 years, at a time where growth was already fragile. It is likely that the US will experience a mild recession between Q4 2024 and Q2 2025, which would lead to a global recession. China seems likely to continue its low growth trajectory in the absence of a meaningful stimulus package from the government.
As a result, we remain conservatively positioned in our portfolios, but with a tactical overweight to defensive US equities. We have a high allocation to global bonds which provide a strong hedge during a recession. South African equities are particularly cheap but vulnerable to a global sell-off. One needs to carefully pick companies that can grow their earnings in a low growth environment. Given the continuing decline in investor sentiment towards South Africa, we have further reduced our exposure to South African government bonds, which have been a value trap over the past year. We prefer exposure to high-quality secured credit. We also hold a lot of cash in our portfolios. We prefer USD over ZAR. The weakness we saw in 2023 despite a supportive global backdrop is testament to how fragile the ZAR is. Our large cash position gives us the dry powder we need to take advantage of bargains that may arise from a market sell-off.
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