At the start of the year market participants were optimistic that the US Federal Reserve would cut interest rates as soon as March. However, robust data since has indicated that the US economy remains strong and inflation could be stubborn in coming months.
Fed policymakers have reiterated they expect three interest rate cuts in 2024, which has helped calm some investor concern.
Business Day caught up with Nicholas Dakin, portfolio manager at Sasfin Wealth to make sense of these events.
The Fed indicated that interest rates should still come down this year but that its decision will be data-driven. With robust recent numbers on growth and jobs, how much room do you see it having?
The Fed noted that there was a clear disinflation trend in place but it had been a fairly uneven path. The core PCE deflator (a measure of inflation that the Fed watches closely) is below 3% currently and gradually easing its way toward the Fed’s official target of 2%. It may well take many months before the 2% level is reached or breached but the Fed will probably move to cut before that happens. The federal open market committee’s (FOMC) “dot plot” projections show Fed members’ expectations remain at 75 basis points (bps) of easing this year.
There are still six FOMC meetings in 2024. Based on recent inflation data, I believe we will see the first rate cut in June, but that could well stretch into July. They will then probably proceed to cut rates by a conservative 25 bps at each of their meetings in September and November, before pausing in December to restrain overly exuberant seasonal spending.
What about the SA Reserve Bank? When do you see the first interest rate cut being implemented? And how many, if any, could be on the cards for 2024?
While the Bank is not beholden to its quarterly projection model (QPM) for policy decisions, the QPM is currently indicating 50 bps of easing in the repo rate in 2024. The inflation outlook isn’t expected to change very much in the short term, so it might skip rate cuts in May and July and give us 25 bps in September and again in November (as they err on the side of caution and take their cue from global central banks). The rand will have a key role to play in this. My fear is that any further deterioration in the currency against our main trading partners may take all cuts off the table this year.
Apart from the outlook on inflation and interest rates, what else have been the main drivers in the markets, both globally and locally?
On the positive side are the themes of AI, semiconductors and weight-loss drugs.
On the negative side, those that rely on a stronger Chinese economy could battle amid a lack of bold policy action from the People’s Bank of China.
The constrained SA consumer and poor economic growth continue to be the primary cause of the local stock market’s underperformance.
In this environment, what sectors are you bullish on and which are you avoiding at present?
With inflation heading lower, and interest rates soon to follow, I believe that offshore technology and consumer stocks will still be the primary beneficiaries, but global markets may take a bit of a “breather” after a great run.
Generally, I am negative on most sectors locally but those more heavily reliant on domestic consumption such as the retailers are likely to remain under more pressure than others.
I do, however, believe that local investors should look at individual company fundamentals rather than at entire sectors. While a company may be in a weak sector, it can still perform well. A good example is Shoprite, which has still managed to deliver solid results relative to its peers and the rest of the market despite operating in a very challenging arena. Outsurance is another good example.
Which other stocks do you like and dislike?
On the local market, I continue to favour stocks with decent foreign earnings (rand hedges). While it will be a bumpy ride, Naspers should continue provide decent returns over the long term, while BHP Group is exposed to the right commodities.
With little to no economic growth expected for the foreseeable future in SA, I’m also not afraid to pay up for SA companies that are “safe and steady” and still able to grow earnings — even if the growth isn’t too exciting ... those that have a clear competitive advantage and give their customers a reason to return, which will allow them — among other things — to take market share and increase prices. Some names that come to mind are Bidcorp and Bidvest, and Shoprite. Standard Bank and FirstRand will have to deal with more defaults, but I think the valuations reflect this. Aspen is on the right path again and recent results reflect this. I’ve also been keeping an eye on property group Shaftesbury Capital recently.
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