Our webinar series, featuring Anton Eser and Christopher Eddy, offers a comprehensive overview of their shared perspectives on our multi-asset Outlook and performance updates.

2024 – Q1

Click here to register for the Q2 Multi-Asset Outlook Webinar


Where should investors turn in the quest for returns in Q2 2024?

South African investors endured a lacklustre first quarter in 2024. Given this backdrop, a critical question emerges: where should we turn for growth in the second quarter and beyond? A recent webinar hosted by 10X Investments sheds light on this very issue. Our multi-asset outlook, led by CIO Anton Eser and Head of Multi-Assets Chris Eddy, explores not only which asset classes are poised for strong performance in 2024, but also the key local and global risks investors must be aware of in the coming months.

Can US equities keep outperforming?

One key trend from the past few years is the outperformance of US equities, initially driven by low interest rates in the wake of the 2008 Financial Crisis (further accelerated by the COVID-19 pandemic) and decades of tax cuts.

It’s also worth noting that most of the returns in US equities in recent years have been dominated by just seven big tech companies. Referred to as the “Magnificent Seven,” they are Apple, Amazon, Alphabet, NVIDIA, Meta, Microsoft, and Tesla. In 2023, their collective valuations increased 70%. Together, they represent almost a third of the total US equity market.

“Over the past five years, you’ve really seen US equities take the lead,” said Eddy. “While global equities have been delivering strong returns that have primarily been driven by US equity market exposure.”

As Eser pointed out, however, there are risks that this performance isn’t sustainable, particularly as the age of low interest rates and low taxes comes to an end. Interest rates have already seen significant increases as the Federal Reserve seeks to tame inflation, while taxes look set to be next.

“Trump’s tax cuts from 2019 are due for expiry next year,” he said. “I hate to use the word ‘definitely’, but it’s very unlikely that tax rates are going any lower in the US from here, given where we are. So two big tailwinds are set to become two big structural headwinds from here for the next 10 years.”

According to Eser, the multiples at which the Magnificent Seven are trading should also be seen as a potential risk for investors.

“The S&P 500 now is at nosebleed levels from a valuations multiple perspective,” he said. “That doesn’t mean it can’t go higher, anything’s possible in this business. But we’re really at that point where we’re in the top few percentiles of multiples from a US valuation perspective.”


Growing US fiscal risks

Of course, there are US risks outside of equities too. Fiscal risks are at play too.

“The big elephant in the room this year, and actually, this cycle has certainly been fiscal policy,” said Eddy.

The fiscal deficit, he said, is a particularly large risk on that front.

“If you strip out war time and the COVID-19 pandemic, the fiscal deficit is actually the largest it’s ever been with the economy in a normal steady state,” he said. “Ultimately, that’s come through both increased spending and a reduction in taxes. Ultimately, if you’re earning less and spending more, you need to finance the difference with debt and that’s what’s happening.”

Much of the increase in the deficit, he pointed out, happened at a time when interest rates were low and debt was cheap. And while the economy has held up even with increased interest rates and government spend, there are signs that this could come to an end. Most notably, excess liquidity is set to decline in 2024, creating a challenging environment for increased supply.

“Liquidity going into the market and out of the market ultimately has a huge impact on portfolio performance,” said Eser.

Adding to this sense of uncertainty is the fact that the US goes to the polls in November and, as Eser pointed out, “fiscal spending is going to be a hugely debated topic.”

“In our view, from a risk perspective, when we look at bond markets, we definitely have an eye out for the risks inherent in the US’ fiscal position,” he added.


SA elections to take country into unchartered waters

Another big risk factor identified by the 10X Investments team is South Africa’s upcoming provincial and national elections. Scheduled for 29 May, the election looks set to take the country into uncharted territory, with there being a high likelihood that the ruling ANC will have to enter into a coalition to retain power.

“Some of the risks from a market perspective are really if the ANC drops below 40%,” said Eddy. “Because what that will then mean is that it would need to move into a coalition with the DA on one side or a combination of the EFF or MK Party (MKP), which seems to have become more prominent in recent months.That combination and coalition with the EFF/MKP is a bit of a tail risk from a market perspective,” he added. “We’re not trying to predict the elections, but understanding the range of different scenarios is important in how we build our portfolio.”

He further noted that the risk of an ANC coalition with the EFF/MKP has been priced differently in different markets.

“The South African bond market is pricing in an elevated risk, but that’s not being reflected in the currency markets,” he said. “So as we think about building a well-diversified portfolio, we prefer to hold a higher allocation of South African bonds but diversify that to quite a high allocation to hard currency exposure within the portfolio.”


Let cash play a diversification role

 With all that in mind, what approach should investors take in Q2 2024? According to Eser and Eddy, cash could play a much larger role in diversification going forward.

“The diversification benefit from stocks and bonds is potentially somewhat muted,” said Eddy. “And the role that cash plays in the portfolio from an asset allocation perspective is important to us.”

It doesn’t hurt that cash is playing this role at a time when there are really high yields on cash.

“So ultimately, holding cash is an option to buy asset classes at cheaper valuations, whether that’s bonds or equities,” said Eddy. “At the moment, holding cash has a very low cost because of the higher yield returns that it’s currently delivering.”

 Given the performance of the S&P 500 and big tech in particular in recent years and months, that might seem like an overly cautious position. But the very real risks those stocks face in the coming months, being a little more circumspect today could save you a lot of egg on your face in the longer term.






Are you looking to get in touch? To ensure we get the most relevant person to call you back, please select whether you are a Private or Professional Investor below: