‘Local markets will be volatile before the elections’

The big wildcard overhanging local markets is the upcoming national elections and the possibility of an entirely new political order should the ANC poll less than 50% and be forced to make deals with smaller parties to stay in power – or lose altogether.

“Markets will be volatile before the elections,” said Anchor Capital CEO Peter Armitage in an investor presentation on Monday. He outlined several scenarios that might emerge.

Read: Great expectations

Should the ANC gain 45-49% of the vote, it will have to seek a coalition partner that is not too demanding. That coalition will come at a cost, perhaps handing over key portfolios such as finance and the deputy presidency to smaller parties.

In another scenario, the ANC scores 40-45% of the vote, and smaller parties work together to get rid of the ANC, heralding a new era for the country, with new rules, cooperation without greed, and where the interests of SA are placed above those of a single party. 

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Should the ANC poll less than 40%, other interesting possibilities emerge, such as the ANC and DA entering a coalition, with President Cyril Ramaphosa remaining in office until 2026 when a new president will take over as sitting president.

The trends are definitely against the ANC, which has seen its share of the vote dwindle from about 70% to 57.5% since the first democratic elections in 1994. Voter turnout, too, has dropped from 88% to 65% over the same period.

This will weigh on the markets until the election result is decided, but there is no doubt that it is the most significant election in three decades.

Armitage believes the next three years hold more promise than the last three, which were bedevilled by Covid, wars and rampant inflation. Economic growth will likely rise from here as interest rates decline and US corporate earnings recover. 

AI changes everything

One development likely to change everything is artificial intelligence (AI), and investors are prone to underestimate the impacts of major technological leaps.

Markets had underestimated previous technological revolutions such as the PC, internet, mobile phones and cloud computing, with initial forecasts of adoption typically undershooting actual figures by 38%.

Anchor Capital market analyst Mike Gresty argued that markets are anticipating an economic soft landing on the back of declining interest rates but cautioned that forecasting in a volatile geopolitical and economic environment could come unstuck.

In 2022, for example, markets were cautiously optimistic after two stellar years, but that was undone by Russia’s invasion of Ukraine, China’s extreme Covid lockdowns and the fastest interest rate hike in history. The result was a drop of 18% in developed market equities in 2022 and a 20% drop in emerging markets.

The reverse occurred in 2023, when markets anticipated negative returns for the year, with many predicting a recession. There was no recession, the US economy was surprisingly resilient, and inflation was tamed. The result was a 24% bump in developed market equities and 10% in emerging markets (but only 3% in SA). 

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Gresty expects 7% growth in global equities for 2024 – nothing spectacular, but positive from a compounding point of view.

Ten years ago, companies that dominated the S&P 500 index were a mix of tech, oil, banks and consumer goods.

How tech has come to dominate markets

Today, the top 10 companies in the index are largely tech-related, the only outliers being Berkshire Hathaway and JPMorgan Chase. The forward price-earnings (PE) multiple on these stocks is demanding at close to 30.

Below the top 10, however, a different picture emerges, where forward PE valuations are less challenging at about 17.5, presenting plenty of opportunities for investors. Corporate earnings in the US are recovering after several choppy years and will be helped along by lower borrowing costs as rates decline.

Among Anchor Capital’s global stock picks for 2024 are banking group Citi, Estée Lauder, Rentokil, Starbucks and Scottish Mortgage Investment Trust.

Liam Hechter, fund manager at Anchor Capital, said despite a lacklustre year for SA equities, the picture was better for financials and industrials. Local equities should deliver 10% growth in rands and 7% in US dollars, though the upcoming elections increase the forecast risk for SA.

PE multiples are cheap in SA relative to overseas, which creates considerable upside potential. The chart below shows the steady decline since 2015 of PE multiples. 

One local stock pick highlighted by Hechter was Dis-Chem, which has seen its operating margin decline to nearly half that of Clicks since 2013 but appears poised for a rebound with improved management of capital and a firmer grip on costs.

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Anchor Capital chief investment officer Nolan Wapenaar said he expects the US economy to slow down in the early part of 2024 and recover in the second half. The market is pricing in six rate cuts in the US this year.

Geopolitical tensions remain ever-present, though these are unlikely to derail the generally positive scenario.

The SA bond market is driven by global interest rates and an oversupply of local bonds. Government bond issues are growing faster than the economy, and that is crowding out other investments.

It’s likely, however, that local bonds will benefit from a more positive global environment. This should crowd out domestic negatives such as load shedding, port congestion, election uncertainty and fiscal pressures.

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