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There is great uncertainty about economic prospects for 2024, with concerns that growth may disappoint,
and that interest declines may be slower than forecast because of sticky inflation.

The World Bank fears that most economies—advanced as well as developing—are set to grow more
slowly in 2024 and 2025 than they did in the decade before COVID19. Global growth is expected to slow
for a third year in a row—to 2.4 percent—before ticking up to 2.7 percent in 2025. Those rates, however,
would still be far below the 3.1 percent average of the 2010’s. Per-capita investment growth in 2023
and 2024 is expected to average just 3.7 percent—barely half the average of the previous two decades.
Without corrective action, the World Bank believes that global growth will remain well below potential for
the remainder of the 2020’s.

The Bank highlights several downside risks to the outlook, including the prospects of higher oil prices due
to an escalation in geopolitical tensions, financial stress in EMDEs that leads to surging sovereign spreads,
and weaker growth in China resulting in adverse global spillovers via commodity and other channels.
In each case, global growth in 2024 would be reduced by 0.2 percentage point below the baseline. In
addition, political uncertainty remains high, with 2 billion voters set to vote this year, including the USA,
India and South Africa.

US 10-year bond rates have risen from a low 0.54% in July 2020 to over 5.0% in October 2023, the highest
level since 2007. They ended the year at 3.87%.

After falling sharply in 2022, the S&P 500 enjoyed a strong recovery in 2023 with a rise of 24.2%, ending
almost exactly flat over the last 2 years. Most of the growth over the past 12 months has been driven by a
handful of tech stocks.

Local Market developments

After the South African Reserve Bank (SARB) raised the repo rate by a cumulative 4.75% between
October 2021 and May 2023, SARB poised at the July, September and November 2023 meetings, citing
expectations that inflation was forecast to remain within the 3-6% target band. The November decision
was unanimous, after split voting in July when 3 votes were in favour of no change in rates and 2 in favour
of a rate increase. This may suggest that the rate hiking cycle is over and the next move could be down,
though not in the near term. SARB again suggested that alternative methods be considered to reduce
inflation, including achieving a prudent public debt level, increasing the supply of energy, moderating
administered price inflation, and keeping real wage growth in line with productivity gains. However, there
is no evidence that these alternative methods are likely to be introduced any time soon. SARB also stated
that “serious upside to the inflation rate remain.”

The South African Reserve Bank in November raised its forecast for 2023 GDP growth marginally
from 0.7% to 0.8%, and for 2024 and 2025 to 1.2% and 1.3% respectively because of expectations of
a decrease in loadshedding. A sustained reduction in load-shedding, or greater energy supply from
alternative sources, would significantly increase growth. They also noted that the operation of the ports
and logistics have become a serious problem.

For the 12 months ended December 2023, the JSE All share returned 9.2%, The Listed Property Index
returned 10.1% and cash (measured by the STEFI) averaged 8.0%. The 10-year SA Government bond yield
rose from 10.84% at the end of 2022 to 11.04% at the end of 2023, after peaking at 12.22% in October.

Fund Strategy and Performance

Our view is that inflation is likely to decline further in major economies, as well as in South Africa, though this decline may be slow and erratic. This will allow Central Banks to pause on further interest rate hikes, but we may not see a broad reduction in interest rates until next year. As described in previous strategy updates for the Fund, we believe that with South African 10-year bond rates of almost 12%, investors are adequately compensated for risk. Accordingly, we maintain a full exposure to fixed rate bonds, within our long-term strategic risk limits. In the longer term we believe that there is a risk of further increasing inflation in South Africa and we are monitoring our bond position closely. The trend in government debt also needs to be watched. The Fund has a large exposure to inflation linked bonds, which offer some protection to investors if inflation remains high. Credit exposure is limited as we see risk in the credit space, without seeing great protection from the credit spreads in the local market.

In equities we have invested in selected opportunities. We are cognizant of the risks facing the broad economy, from weak consumer demand, declining commodity prices and loadshedding and the pressure this could place on general corporate earnings. On average these risks are considered to be largely priced in.

The Fund returns to 30 September 2023 were 8.9% over the past year and 11.0% p.a. over the last 3 years. This compares to the Fund’s benchmark of 10.5% and 7.9% p.a. respectively, which is represented by the average of the (ASISA) SA Multi-asset Low Equity category. The fund’s long-term target is CPI plus 4%. Performance was enhanced by some outstanding increases in prices of the shares selected for the portfolio, including Reinet (+55.6%), Gold Fields (+41.2%), Bidvest (+39.4%), Reunert (+39.1%) and Naspers (+35.7%).

The Fund is, as usual, cautiously invested, cognizant of the risks facing investment markets.  Internationally there remain downward risks to equity markets as interest rates remain high and corporate profit growth remains uncertain. Domestically, loadshedding, poor consumer and business confidence, weak commodity prices and still high inflation and interest rates are a concern for investment markets. We believe that the Fund is well positioned for the risks facing the economy, while still in a position to deliver inflation beating returns from its current base over our investment horizon.

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About the Author

Errol Shear
Portfolio Manager, Sasfin Asset Managers

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