Discovery Invest 2024 market outlook - A year of selective opportunities that require taking control

Two years ago, Discovery Invest and its partners cautioned that the world was entering 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’s clear that something has changed, and it’s structural in nature.

Today’s regime of slower growth, higher inflation and interest rates, and greater volatility, will define 2024 as a year of selective opportunity for global investors.

This “volatile new normal will demand skilful active management supported by globally present and experienced research teams,” predicts Kenny Rabson, CEO of Discovery Invest.

While global equity markets showed surprising resilience in 2023, with notable forecast-beating performance in the United States, Rabson observes that this rally was “led by a small handful of mega-cap tech stocks.” For the rest, global equities remained volatile and unpredictable.

Locally, “the prospect of a positive outcome for the global economy helped lift South African equity and bond market sentiment towards the end of the year, although both asset classes closed well behind their global counterparts,” reports Rabson.

In 2024 global fragmentation presents selective opportunities

As geopolitical tensions multiply, and as many countries hold elections in 2024, this is set to be a year of selective opportunities characterised by dispersion of growth across regions, industries, assets and individual counters.

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.

It is against this background that interest rates are expected to remain at the current elevated levels and may not come down as quickly as initially anticipated.

In the aftermath of the pandemic, “we knew that inflation would increase and, to cool prices down, interest rates would do the same,” says Rabson. Given persistent structural pressures, however, it now looks like a reduction in interest might be delayed and will be more gradual.

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

This slower-than-expected rate of monetary policy relaxing is seeing the consensus among Discovery’s partners coalesce around muted prospects for growth in most of the world’s developed economies. When, however, central banks eventually begin relaxing monetary policy, sentiment is likely to improve, buoying both local and global equity markets and delivering decent returns.

While BlackRock maintains a broad preference for emerging over developed market assets, selectivity is key. Adopting a mega force lens, for example, India’s system of digital payments bodes well for the future of finance there. Low-carbon transition presents opportunities in Latin America, especially for countries with large reserves of copper and lithium. United States companies near-shoring operations and production closer to home could also benefit countries like Mexico.

“What is going to be crucial for the next year is deciding the right time for those conservative clients to rotate into equities. There is a risk that when interest rates start coming down, you miss the boat,” says Rabson. “From an after-tax point of view, staying in the market for the long-term remains the better tactic,” he adds.

Geopolitical tensions and elections

Adding to the uncertainty and volatility that has come to characterise the new market regime, are geopolitical tensions, and major elections.

Although the world was already dealing with geopolitical conflicts, a year ago no one could have anticipated how rapidly the world would become polarised between the East and West, and increasingly North and South.

2024 may see geopolitical uncertainty amplified by elections as roughly 40% of the global population – including in South Africa – holds elections.

Both RisCura and Ninety One agree that political uncertainty often begets market volatility, increasing unpredictability. One certainty that Discovery Invest and all its partners agree on, however, is that “increased uncertainty demands more active, as opposed to passive, investment management,” says Rabson. Today’s regime of greater macro and market volatility and uncertainty, along with the dispersed nature of returns demands that “we abandon autopilot and actively take control of investment.”

Digital disruption and artificial intelligence will also continue to advance exponentially as innovation snowballs. Beyond tech, investors also need to adapt to demographic divergence, the future of finance as private credit grows in popularity, the low-carbon transition, and to an increasingly multi-polar world.

As such, in addition to 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. Rabson anticipates, “even within economies, this will drive dispersed returns over the longer term.”

This new normal demands “expert, globally-literate managers working full time to allocate your money to the right countries, currencies and asset classes at the right time,” concludes Rabson.