REFLECTING ON 2023: A YEAR OF SHIFTING NARRATIVES AND INTEREST RATES

As the year unfolded, we witnessed a remarkable evolution in economic expectations. Initially, forecasters braced for a looming recession, but the consensus pivoted to a "higher for longer" scenario, anticipating prolonged periods of elevated inflation and interest rates. However, the plot thickened, and by Q4, the narrative took another turn, with a focus on cooling inflation, discussions of a "soft landing" for the economy, and growing speculation of potential rate cuts in 2024.

These abrupt turns in the prevailing economic outlook underscore the formidable challenge of forecasting in the backdrop of recent years, marked by the lingering effects of COVID and our adjustment to the "new normal." The profound changes in our consumption patterns, work dynamics, and sources of goods and services since the pandemic have naturally disrupted economic forecasting and modelling, creating an extended period of distortion.

Navigating the financial markets proved elusive amid the economic unpredictability. Notably, 2023 deviated from expectations, as Wall Street strategists collectively anticipated a down year for the S&P 500 - the first occurrence since 2008. Contrary to these predictions, the S&P 500 posted a 24.23% return (26.44% with dividends), which made up for 2022's loss of 19.44%.

The surprising resilience of the stock market imparts valuable lessons on the challenges of market timing and the importance of adopting a long-term perspective, staying invested even in uncertain times. It also underscores the significance of context and emotion. While 2023 might have felt turbulent at times, a closer look reveals that US stock market volatility, as measured by the VIX Index, receded throughout the year—from a peak of 25 in March to just 12 in December, similar to pre-pandemic levels in 2019.

In just twelve months, the financial landscape has undergone a remarkable metamorphosis. Stocks and bonds are riding high on the tailwinds of a US Federal Reserve (Fed) shift from rate hikes to anticipated cuts. The S&P 500 inches ever closer to its historical peak, extending the rally beyond the confines of big tech. Concurrently, 10-year Treasury yields are dipping below 4% for the first time since July 2023.

Global markets rose higher in December, following a strong performance in November, supported by a dovish message from the Fed. Following their last meeting of the year, the Fed revealed their interest rate forecast which included at least three rate cuts in 2024. This has been the clearest signal yet that we are at the peak of this interest rate hiking cycle. The US 10-year bond yield fell further, reaching levels below 4%. This move contrasts with the almost 5% peak reached in October. Notably, we saw improved breadth in December as momentum spread beyond the “Magnificent 7” which dominated returns in 2023.

Navigating this Paradigm Shift becomes imperative as we contemplate the evolving environment. Fed Chairman Jerome Powell's resolute stance on rate hikes from the previous year has yielded to a new reality. Inflation, once a looming concern, has receded by half across developed economies, while the labour market exhibits resilience. The recent Fed policy meeting serves as a pivotal moment, marking the anticipation of rate cuts totalling 75 basis points in 2024, ultimately revising the policy rate to 4.6%. As we stand at the crossroads of this transformation, it's essential to grasp the implications and chart a course through the evolving financial landscape.

THE DOMINANCE OF THE "MAGNIFICENT SEVEN"

Throughout the year, a prevailing trend in the US equity market was the persistence of both size and style dispersion, accompanied by a noteworthy concentration among a select group of stocks known as the "Magnificent Seven." This elite group comprises Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla.

Remarkably, these seven stocks collectively constitute nearly 28% of the entire S&P 500 and accounted for almost two-thirds of the index's total return in 2023. Investors who opted for a more diversified approach, deviating from allocating a substantial portion of their portfolio to these seven names, found it challenging to match the performance of the S&P 500.

A SPOTLIGHT - AND SOMETIMES A CANDLELIGHT - ON LOCAL AFFAIRS IN 2023

Despite a record year of load shedding, progress appears to have been made in the electricity crisis. Nersa received registrations for 4.1GW of new generation, attracting around R111 billion in investment. However, challenges persist, notably in the Renewable Energy Independent Power Producers Programme which is facing delays in new electricity procurement. Despite a slight contraction in Q3 GDP, the economy demonstrated some resilience to load shedding.

The logistics crisis emerged as a significant hurdle, affecting South Africa's ports and causing economic setbacks. The National Logistics Crisis Committee hopes to emulate the electricity sector and to encourage private sector participation.

The logistics crisis has become the next major challenge for the economy. South Africa’s ports are facing a major backlog - reducing the number of materials available for export. There are many reasons - from theft and vandalism, to poor maintenance - but the impact is now clear. Economic growth numbers are showing falling sales and production of commodities and other goods owing to this crisis.

In the health sector, the passing of the National Health Insurance Bill raises concerns. The uncertainty created by the Bill may damage this sector, causing delays in investment and pushing medical professionals to seek opportunities elsewhere. Analysts advocate for collaboration between the private and public sectors to address the challenges, drawing parallels with successful joint efforts during the Covid-19 pandemic.

South African markets had a strong finish to a challenging year. The FTSE/JSE All Share Index recorded a second consecutive month of gains, delivering a total return of 2.2% in December. Bonds and property were also positive for the month. Property recorded its best monthly performance of 2023, supported by a lower interest rate outlook. This same sentiment drove the broad-based equity rally.

SOME KEY EVENTS IN 2023

DESTINY PORTFOLIO RETURNS | 2023

The JSE All-Share Index concluded 2023 with a 9.25% return whilst the rand experienced a 7.48% depreciation against the dollar. South African investors in the MSCI World index witnessed a 33.04% return in rands for the year, while a cautious investor holding cash throughout 2023 gained only 8.06%.

The Destiny Portfolios outperformed the JSE as well as most of their peers. The Market Enhanced Portfolio achieved a return of 13.10%, whilst the Destiny Moderate Portfolio secured 13.04%. The Conservative Portfolio reached 13.27% and the Defensive Portfolio earned 13.33%. Lastly, the Destiny Global Enhanced Portfolio excelled with a commendable 15.08% return over the period.

Considering local challenges and aiming for a global perspective for our members, the GIB Investment Committee has approved an increase of the offshore allocation across all portfolios. This decision stems from the success witnessed with the Destiny Global Enhanced Portfolio and takes advantage of legislative changes enacted last year.

INVESTING IS A LONG-TERM EXERCISE

The past year saw substantial challenges for financial markets, increasing investor apprehension amid uncertainty. Emotional reactions, such as panic-selling or opting for cash hoarding over pursuing growth opportunities was widespread, yet potentially harmful in the long run. Adopting a long-term perspective can help mitigate the immediate impact of global events on investment performance. Significant declines in asset prices have rendered stocks and bonds more attractively priced, offering investors favourable entry points and rare investment prospects.

As we conclude another volatile year, it is imperative not to allow short-term volatility to dictate long-term investment strategies. Seeking objective insights and consulting a GIB financial advisor for comprehensive, multi-generational financial planning and retirement strategy is strongly advised.