Lemons or lemonade in 2024?

While US and Japanese markets hit new all-time highs on a daily and weekly basis, emerging markets such as China and SA have been struggling.

China’s market is down 62% over three years, while SA’s JSE is currently ‘down’ by 2.5% over 12 months.

In addition, our GDP only grew by 0.8% in 2023 and the forecast for 2024 is 1.3%.

Far too many political and economic lemons.

Faced with load-shedding, elections and an anaemic GDP growth year ahead, why is the Edge Asset Management investment committee bullish for the next 12-18 months?

Based on four key macroeconomic points, we believe that now is the best time to invest since the ‘Great Bull Market’ of 2003.

According to chief Standard Bank economist Goolam Ballim, SA can expect at least four 25bp (0.25%) interest rate cuts over the next 12 months.

We believe a 40% chance in May but a 75% chance in July.

On February 23, Goldman Sachs stated that with US inflation having peaked, they forecast four 0.25% rate cuts for the US.

US inflation is key to US dollar strength as we all view how strong the dollar is against the Rand at present.

I say view as many people view the Rand as being weak, when in fact stronger US interest rates attract global investors who seek safe +5% cash dollar yields (vs the 0.25% they got two years ago). It makes the dollar stronger. As soon as the US Fed starts reducing rates, so too should the dollar weakening cycle start, with commodities becoming far cheaper.

Chinese markets are ‘down’ 62% over three years, the longest downturn since China reopened in the 1990s.

The Chinese have also had several headwinds. It is a wellknown fact that there has also been no/little demand for Chinese goods.

But think back three years when SA came-out of Covid lockdowns? We had record high household savings and record low interest rates.

What did we do? We spent and that consumer spending trickled into the construction and luxury goods sector.

China only came out of lockdowns 12 months ago and it has taken Chinese consumers some time to realise they won’t go back into lockdown.

That certainly was the case until two weeks ago as the Chinese consumer had not yet spent their Covid household savings until Chinese New Year.

Suddenly, more than 200 million Chinese travelled by plane, train and boat within a week. That also means 200 million people spending on consumer goods.

The People’s Bank of China (equivalent to their Federal Reserve) also had another record rate cut, the sixth so far, to further stimulate consumer spending and the property sector.

As the Chinese consumer starts spending again, it will mean that Chinese industry will, after years of decline, once again need resources. Due to a strong dollar, SA currently has relatively cheap resources.

When there is demand for our minerals, the knock-on to SA’s industrial and service sectors is significant.

The expected demand will, in my opinion, add significant extra growth to our GDP over the next few years.

Finally, record low Price Earnings Ratios: Many shares on the JSE are trading at record low forward PEs of 4 or 5. This is almost unheard of. The last time PEs were consistently this low was in 2003.

In summary, SA is fortunate to have numerous global commodity and consumer goods companies that should benefit from the perceived risk on bull market listed on the JSE.

JSE industrials such as Naspers, Richemont and Bidvest should benefit from local, Chinese and global consumer spending, while miners such as BHP, Anglo and Implats should benefit from Chinese industrial demand.

We believe that as interest rates lower, SA banks will benefit together with local retailers. All of these counters are currently on our ‘buy’ list.

It is impossible to predict an exact date that the cycle will turn, however, based on many facts and the greater balance of probability, the investment team at Edge Asset Management have conviction that the next 12 to 18 months will see many good investment returns.