Reflecting on The Last Quarter of 2024

There was no shortage of market-moving events in the final quarter of 2024. October was filled with uncertainty and volatility as the world awaited the results of the US election in early November. The election results had an immediate effect on global markets, with US equities lifting to record highs following the Republican win in the presidential election, the House of Representatives, and the Senate. However, the positive sentiment was short-lived as the Federal Reserve announced a slower pace of interest rate cuts in 2025 following strong employment data and persistently high inflation. Local equities were under pressure as rising US yields and a stronger dollar weighed heavily on emerging markets. The rand depreciated steadily from 17.27 to 18.85 over the quarter. In local fixed income markets, short-term rates drifted lower as both the South African and Namibian Reserve Banks cut interest rates. Long-term rates rose, however, dampening bond returns. Namibian inflation moderated to 3.0% YoY.

Fixed Income - Money Market

Short-term interest rates declined during the quarter as both the Namibian and South African Reserve Banks implemented two benchmark interest rate cuts each, totalling a 50 basis point reduction. This policy adjustment was widely anticipated as part of a broader effort to stimulate economic activity in the face of moderating inflation pressures. However, these reductions will likely result in lower money market returns throughout 2025, particularly as rates remain subdued in the near term. On a more positive note for short-term interest rates, the US Federal Reserve has signalled a cautious approach to its rate-cutting cycle. Strong economic data from the US, coupled with a persistently high inflation outlook, has prompted the Federal Reserve to reconsider its earlier, more aggressive stance on monetary easing. By slowing the pace of rate cuts, the Federal Reserve aims to strike a balance between supporting economic growth and managing inflation risks.

Fixed Income – Bonds

The final quarter of 2024 saw muted returns from fixed income markets as the post-election rally in South Africa subsided. Global and local factors shaped market dynamics, including Donald Trump’s re-election as US president, signalling potential tariff wars and inflationary pressures. While inflation in Namibia and South Africa continued to ease due to lower food and energy prices, both countries initiated interest rate cutting cycles to stimulate growth. In Namibia, the election of the country’s first female president generated optimism, though tangible policy outcomes are awaited. Demand for Namibian government bonds weakened as valuations appeared stretched, leading to a widening of spreads on short and mid-yield curves, detracting from relative performance. Despite this, the asset class delivered solid annual returns, supported by the declining rate environment, though risks to inflation persist due to global geopolitical tensions. The outlook for the asset class remains neutral.

Equity

The South African equities market faced a challenging fourth quarter, with the benchmark posting a total return of -3.56%. Year-to-date, the benchmark managed a respectable return of 9.84%. Market volatility was influenced by global and domestic events, including Finance Minister Enoch Godongwana's Medium Term Budget Policy Statement and the election of Donald Trump as the 47th president of the United States. Trump's "America First" policies added uncertainty to developing markets, while escalating tensions in the Middle East also weighed on investor sentiment, contributing to a depreciation of the rand from 17.27 to 18.85 against the USD. Sector performance was mixed during the quarter. Pepkor Holdings in the consumer discretionary sector emerged as a standout performer, while Northam Platinum and the broader materials sector struggled due to global headwinds, particularly China's sluggish economic performance. Even gold faced a downturn, reflecting the heightened uncertainty over the past two months. Looking ahead, the direction of South Africa's equity market will depend on global macroeconomic developments and domestic policy shifts, including the South African Reserve Bank's potential move to target a lower inflation range, which could have broader implications for economic growth.

Property

The property market experienced a mixed fourth quarter, ending with a modest quarterly return of -0.83% but an impressive annual return of 29.0%. The quarter was shaped by a combination of factors, including declining interest rates, improving consumer confidence, and tightening vacancy rates. Lower funding costs, driven by rate cuts, provided a tailwind for leveraged property companies, while easing inflation and a stabilizing macroeconomic environment supported expectations of growth in net operating income and dividend payouts. Emerging European markets, led by NEPI Rockcastle, delivered strong contributions, offsetting some local retail sector pressures. Despite continued market volatility, the sector remains well-positioned, with a positive outlook for 2025 as economic conditions improve and dividend payments are expected to resume.

Outlook

The outlook for 2025 is shaped by varied expectations across asset classes. Locally, short-term interest rates are projected to trend lower, which will likely result in reduced money market returns. In the fixed income space, bond prices appear to be near fair value, suggesting a neutral outlook as yields are expected to stabilize. Equities, however, remain the most uncertain, with performance heavily dependent on global events. The re-election of Donald Trump is anticipated to introduce heightened volatility, particularly through his tariff policies and "America First" agenda, which could create ripple effects across global markets. Overall, cautious optimism is warranted as economic and political developments unfold.