A year of selective opportunities that requires taking controls

Two years ago, Discovery Invest and its partners cautioned that the world was entering into a new market regime, requiring a new investment playbook. In 2023, we witnessed the shift in stock-bond correlation in the face of a 27-year high global inflation rate. As we head into 2024, it is clear that something has changed, and its structural in nature.

Slower global growth, higher inflation, higher interest rates and greater market volatility will define the year as one of selective opportunity for global investors. The case for skillful active management grows stronger. While the global equity markets showed surprising resilience in 2023, with notable forecast-beating performance in the US, only a few mega-cap tech stocks led that rally.

Global fragmentation present selective opportunities

But as the world fragments, and many countries hold elections in 2024, this is set to be a year of selective opportunities characterised by dispersion of growth across regions, industries, and assets.

In BlackRock 's view, the debate around whether the world is in for a ‘hard’ or ‘soft’ landing might be missing the point. Of greater relevance are structural changes, such as ageing populations, decarbonisation, and global fragmentation. These shifts are preventing economies from growing at their pre-pandemic levels without stoking inflation.

So, interest rates may not come down as quickly as initially anticipated.

In the aftermath of the pandemic, we knew that inflation would increase and that interest rates would need to do the same, to cool down prices. But we anticipated that interest rates would eventually come back down. Given the structural pressures, it looks like a reduction in interest might be delayed and will be more gradual.

RisCura also believes that in South Africa, unless there is an unforeseen shock, local rates will decline gradually over 2024 because they have already peaked.

Because of this slower rate of monetary policy relaxing, the consensus among Discovery’s partners is that the prospects for growth in most of the worlds developed economies remain muted. But when central banks do, eventually, begin relaxing monetary policy this typically improves sentiment, buoying both local and global equity markets. This should help markets deliver decent returns.

Geopolitical tensions and elections

Adding to the uncertainty and volatility that has come to characterise the ‘new market regime’, are geopolitical fragmentation, and elections. Although we were already dealing with the Russia-Ukraine conflict, no one could have anticipated how rapidly the world would become polarised between the East and the West a year ago.

In 2024, this geopolitical uncertainty may be amplified by elections as roughly 40% of the global population – including in South Africa – are set to hold major / national elections.

Both RisCura and Ninety One agree that political uncertainty often begets market volatility and can be extremely difficult to predict. One certainty that Discovery Invest and all its partners agree on is that this is a time to be more active, as opposed to passive.

This new regime of greater macro and market volatility, uncertainty, and dispersion of returns requires everyone to abandon autopilot investing and take the controls.

Beyond concerns such as investment style and asset class, sector and geography, active management is better suited to taking advantage of the global mega-trends that are set to define economies, and generate enhanced returns, in the longer term.

It’s really about having expert managers working full time to allocate your money in the right countries, right currencies and right asset classes at the right time.