Melville du Plessis | Positive economic outlook amidst political uncertainty

Interest Rates and Market Performance

The higher interest rate environment has been a double-edged sword. While challenging for individuals with loans, it has been beneficial for fixed-income portfolios. The current rates have allowed for better returns on investments, positioning funds like our Sanlam Investment Management Enhanced Yield Fund in a remarkably good spot. Managed for 13 years, it has consistently outperformed expectations, with results this year reaching a notable high. It posted a rarely seen double-digit return of 10.19% for the 12 months to end June 2024, which is well above current cash rates available at the banks as well as the returns of more traditional money market funds. The fund’s benchmark, which is SteFI+0.5% delivered 9.05% for the comparable period while the average for the ASISA Interest Bearing Short Term category was 9.46%.

Inflation and Economic Growth

Despite global inflation spikes, South Africa has managed to keep inflation remarkably in check. This stability has been advantageous for South African investors, particularly in fixed-income portfolios. The current macroeconomic indicators, such as a stable rand and controlled inflation, suggest a promising outlook for the remainder of the year.

Market Reactions and Investment Philosophy

The market's positive reaction to the election results highlights the importance of removing uncertainty. The initial fears of political instability have been replaced with optimism, driving a rally across various sectors. This scenario underscores the value of long-term investment strategies that focus on fundamental valuations rather than short-term market fluctuations. 

Moving into the second half of 2024: Future Prospects

As South Africa navigates the post-election period, there is a collective hope that the newfound stability will lead to sustained economic growth and prosperity. I’ve been in the markets for almost 20 years, and I’m more excited about them now than ever. Valuations are the most attractive they’ve been in 20 years – as are global cash rates and bond yields. In South Africa, despite all the hard work we know needs to be done, valuations are looking attractive, which has caused the local equity market to react extremely positively.  Additionally, the Monetary Policy Committee of the SARB continues to delay interest rate cuts – although the market pricing being for the easing path to start during the second half of this year – which will also bode well and continue to support continued strong performance from fixed-income portfolios.

From a global context, the outcome of the UK election was quite predictable, which meant the market could largely price it in. The situation in the US will continue to be interesting to watch, with the latest developments of course being Biden having bowed out and Kamala Harris now running for president. The outcome is expected to influence rate expectations and sovereign debt management, with sectors like industrials, technology and other industries well-positioned to benefit from the inflationary fiscal spending. What will be more interesting, perhaps, are the impacts of the UK and US parties’ economic policies over the next three to five years or so. We may see more of an extended volatility in interest rates more broadly, for example, in addition to longer dated yields being more sticky at higher levels even as short term rates adjust lower.

We continue to live in a fantastically dollarised world with the US dollar still very much the dominant currency from an allocation as well as a flow perspective. Furthermore, we’ve seen the ‘Magnificent Seven’ continue to surprise almost everyone with their increasing dominance and performance as well as valuations pushed to the extreme. The performance of US equities have been so exceptional that they represent almost two thirds of the MSCI World Equity Index. However, as allocators of capital, we advocate seeking opportunities around the world to offset risk.

The dollar may still represent the vast majority of investable assets, but there are also many opportunities elsewhere. Looking forward, we recently witnessed the intersection where India’s population has surpassed China’s. The positive demographic tailwinds in India, as well as Africa for that matter, will be a key driver of growth and returns while the negative effects of demographic headwinds in other more developed nations will be a key issue to consider as well. Given the diverging nature of global returns, it would be smart to seek growth and excess returns in geographies on a more diversified basis.

Now, eight months into 2024, we can confidently continue to say the constructive outlook is largely unprecedented. Investors in the local fixed income space have robust forward-looking return prospects on the table, with some valuations and opportunities we have not been seen in some decades. There’s a celebratory mood of optimism in South Africa, with an energy we hope to add to and continue. The future really does look bright.

*Melville du Plessis is Portfolio Manager: Fixed Income Funds at Sanlam Investments.