Last Updated on 13/12/2023 by Carl-Peter Lehmann
1. The Economic Forecast Faux Pas
The adage bears sound smart while bulls making money was certainly true in 2023. It’s rare to have two consecutive years that deliver negative returns. And after the annus horribilis of 2022, most economists and strategists were predicting more of the same at the start of the year. Mike Wilson of Morgan Stanley being the most vocal on Wall Street. Hywel George the Head of Old Mutual Investments (amongst many local portfolio managers) was also decidedly bearish with a price target of 3500 on the S&P 500. Oops.
The fact is on average 7 out of 10 years delivers positive equity market returns. Stocks, lead earnings, lead the economy. But many professional money managers apply that process in reverse. And we wonder why so few active managers outperform. Of course, a recession will happen at some point. It’s inevitable. What ultimately triggers that could be anything, and often it’s something left field no one is talking about.
Despite all the fears, primarily around interest rates and inflation, markets defied the negative expectations, showcasing resilience and growth that caught many offsides, while climbing that proverbial wall of worry. This divergence from forecasts serves as a potent reminder of the unpredictability inherent in economic predictions and the complex interplay of factors that drive market movements.
2. AI: The New Market Mover
The markets in 2023, particularly the S&P 500 and Nasdaq, performed remarkably well, defying earlier pessimistic projections. The S&P 500, a barometer of large-cap U.S. equities, showed robust growth delivering a return of almost 20% for the year so far, while the tech-heavy Nasdaq rebounded impressively from its previous year’s struggles, gaining almost 50% for the year. The narrative that all those returns have been driven by a handful of stocks is also patently untrue, which somehow seems to have become gospel. Of the S&P 500 constituents, about 155 companies have outperformed the index, which certainly is below the long-term average of about 280 – but dispels the myth that you’ve only made money by owning mega cap tech.
The story of the year, however, has been Nvidia, which emerged as the poster child for the AI revolution. OpenAI’s ChatGPT propelled the AI story into public consciousness just over a year ago, and which has subsequently seen a massive wave of investment into AI related hardware and infrastructure. The demand for Nvidia’s new AI chips, particularly the AH 100, blew all expectations out the park, resulting in its shares soar a cool 200 plus percent since January. The Global AI Market is anticipated to reach around $2.0 Trillion within the next 10 years bringing with it probably being the biggest investment opportunity of our lifetimes.
Domestically, the All-Share index is up about 7% (in Rands) and the Rand is down about 10% for the year against the US Dollar. Puts the returns above (in Dollars) into context. At least MM funds have been yielding almost 9% which isn’t a bad risk-free rate of return. SA retirement funds as represented by the average Balanced Fund, have delivered a return of just over 10% YTD, for once delivering on their mandate of achieving an Inflation Plus 5 return.
Read Next: Top AI Stocks to Consider in 2023
3. The Inflation and Interest Rate Dance
At the start of 2023, inflation was the dominant concern, with it still hovering at 6.5% in the US and the FED Funds rate at 4.25%-4.50%. The FED has gone onto hike by another 100 bps with inflation in the US ending the year at about 3%. While their stated goal of 2% inflation might take a while to reach, inflation at closer to 3% and long-term treasury yields between 4% – 5% are by historical standards still reasonable.
Meanwhile in South Africa inflation started the year at 7%, and after falling to a low of 4.7% in July, has reaccelerated to almost 6%, despite the SARB holding rates at 8.25% (with prime at 11.75%). It’s been tough for individuals and households with debt to sustain the rise in borrowing costs we’ve seen over the last two years, and we all wait with bated breath for cost-of-living pressures to ease.
A lot depends on the price of oil, which started the year at about $85/barrel and now finds itself closer to $75/barrel – after almost reaching $100 in late September. Will there be another twist in the tail, or have policy makers finally broken the back of inflation as we head into 2024?
4. Geopolitical Tensions: Further Conflict
The last thing we needed (or expected) coming into the year was another war. The emergence of a new conflict in the Middle East adds a complex layer to the global geopolitical landscape. This conflict not only heightened regional tensions but could also have far-reaching implications for global energy markets if it doesn’t remain contained, given the Middle East’s critical role in oil production. The Russia/Ukraine War doesn’t seem any closer to an end and with political support for Ukraine waning (with their ongoing need for arms and ammunition), things could still take an unexpected turn (for the worse). All of this is happening against the backdrop of US elections in 2024 (with the possibility of Trump back in office), Cold War II between China and the US escalating, and more division and antagonism between the left and right. That’s before we even get to local politics and what next year’s election could mean for our country.
5. Springboks Bring Us Some Relief
At least we have the Springboks. Siya Kolisi lifting the Web Ellis Cup in Paris on October 28 gave us something to smile about and celebrate. In the toughest route ever to winning the Cup, the team showed remarkable resilience, strength, and character – qualities we as South Africans value and cherish. We may have bumbling and incompetent politicians, loadshedding and a host of other problems, but we always have the Springboks … and as is our nature, we always find a way. Because this is supposed to be about finance related subjects, there are reports that state the Boks earned around R100 million for their efforts. Not bad.
6. The Bitcoin Comeback
Despite all the headwinds and drama in the crypto space – from Sam Bankman-Fried and FTX, to Binance and CZ – crypto is back! Bitcoin is up about 150% on the year and Ethereum 80%. There is not only huge excitement about the potential approval of a spot Bitcoin ETF by the SEC sometime in the new year, but also the next Bitcoin halving, which has typically been the catalyst for a massive Bitcoin bull market. Cathie Wood of Ark, who has been consistently lambasted for the last 2 years and who is a big proponent of Bitcoin and other disruptive technologies, has seen her flagship fund rise by 60% this year as well. Moral of the story, highly disruptive and growth-orientated strategies can (and will) be extremely volatile. They weren’t fun places to be for much of 2021 and all of 2022. Whether you believe in or follow either, is less important than knowing that investing is not meant to be easy, whatever your favoured investment strategy. It’s an emotional rollercoaster that requires fortitude, patience, and belief in what you’re doing.
7. BHI Trust Scandal
In late 2023, the local investors were shaken by the news that BHI Trust was effectively running a ponzi scheme. Thousands of local investors lost everything with a reported R2 billion gone. Craig Warriner, mastermind of the scheme, has quickly become known as SA’s Bernie Madoff. Global and Local, the financial advice firm reportedly most active in promoting the scheme – are hiding behind their lawyers pleading ignorance. The scandal came to light following a whistleblower’s revelations, leading to a swift decline in investor confidence and a wider questioning of regulatory oversight in the financial industry. FSCA where were you? This event served as a stark reminder of the importance of due diligence and the need for robust regulatory frameworks to protect investors.
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward. He is a CERTIFIED FINANCIAL PLANNER and Investment Professional with over 20 years experience.
