Welcome to "Market Insights 2024," your essential guide to understanding the financial landscape. In this episode, Warren Ingram explores the economic upheavals of the past year and the potential of 2024. We'll dissect the impact of tech giants, known as the 'Magnificent Seven,' on global markets, delve into the challenges and opportunities in emerging markets like South Africa, and examine how psychological factors like recency bias affect investment decisions.
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Welcome to "Market Insights 2024," your essential guide to understanding the financial landscape. In this episode, Warren Ingram explores the economic upheavals of the past year and the potential of 2024. We'll dissect the impact of tech giants, known as the 'Magnificent Seven,' on global markets, delve into the challenges and opportunities in emerging markets like South Africa, and examine how psychological factors like recency bias affect investment decisions.
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Welcome to the Kickoff podcast of 2024. I thought that it was worthwhile just doing a bit of a wrap of what happened in 2023, some thoughts about a little bit about the recent past, so we can look ahead and make some clever and kind of rational decisions going into 2024. So I don't normally quote a lot of numbers because I think they're boring, but I think it's good just to give a bit of a context to what happened in 2023. So I wrote down some kind of performances. If we look at world markets and I always look at an index called the MSCI Acquie all country world index so that's developed markets, the emerging markets, it's basically all the stock markets you can get in the world that provide data that market generated about 20% roughly 20% over 2023. So not a bad return when you're buying shares, but important to remember that it was a recovery from 2022, which was an absolute dog show. So it was important that 2023 was a good kind of a bounce from the year before. Otherwise, we would see investors losing a lot of money and a lot of hope. What was interesting about the world markets, though, was there were basically seven shares that kind of held things up right across the world and they've got this name called the Magnificent Seven because they're basically all tech companies listed in the US. If it wasn't for those seven companies, I think the world markets would have generated a return of about 10% over 2023. So when you've got seven shares, adding 10% to the value of the world stock market growth, it just tells you that we've got some very big companies that had a very big year. And if you're curious, the names of those companies are Alphabet, microsoft, apple, amazon, tesla, meta and Nvidia, and the worst performer for that year was Alphabet at 49% and Nvidia at over 200%. Those are just ridiculous numbers from companies. You just don't expect to see a company like Microsoft generating more than 50% growth in a 12-month period. It's such an enormous business that when it does growth like that, you shouldn't expect it to continue.
Speaker 1:So I think if we look at emerging markets, they probably give you well, they will give you a totally different picture. Emerging markets delivered a return of about 5% and that's certainly in the experience that South African investors would have had. And again, important to remember that it came with Alazi 2022 and actually a couple of bad years for emerging markets. So, just in general, I think a lot of investors will look at the index and say if you didn't own the index and you were in an actively managed fund or you bought a selection of your own shares, if you didn't own the Magnificent 7 and basically nothing else, then you didn't have a great year. And you look at the index and you say well gee, the index delivered 20%.
Speaker 1:What's going wrong with my investments? I don't think it's necessarily the right way to look at things. I think you need to understand that seven shares having an unbelievable run is not an indication of how markets or investments have performed actually across the whole board. I mean, when you look at the S&P 500, which is the 500 biggest shares on the American stock exchange, the index is up 23%, but they own the Magnificent 7 in that index. If you just take all the shares in the S&P 500 and you give them an equal amount and equal allocation so you take $1,000 and you allocate $1,000 to every one of those 500 companies you would have generated a return of 10% and that's probably more realistic to understand what actually happened for investors last year. So don't be too bleak. If you own global investments and you generated a return of somewhere around 10%, you probably did. Well, if you own emerging market investments, you own the JSE. Just understand. Emerging markets did 5%. That's what happened, and I think it's a critical point to focus on for what's going to happen into the future, because as investors, we get stuck on the recent past and we generally just say to ourselves whatever happened in the last year, and especially the last five years, that's most likely what's going to happen in the next year and the next five years. That's called recency bias. The psychologists have even given it a name and it's so pervasive and so common that you shouldn't feel bad if that's what affects you. But what you need to understand is it's a deeply flawed way of thinking about investments.
Speaker 1:The reason I say that looking forward is we are probably through the worst of the inflation story in the US, definitely, and then maybe the UK and Europe and also South Africa. Inflation and the interest rates that were used to manage inflation was the main big story of 2023. That was the thing that caused investors to lose a lot of money right through 2022 and through most of 2023 as well. It was only right towards the end of the year, in 2023, where we saw the Fed in America that's, their reserve bank saying we think that we don't need to raise rates anymore. They use very complicated language and they're very guarded. It's a bit like listening to over-trained lawyers who are actually going to tell you nothing, but what you have to do is read between the lines. And read between the lines it looks like inflation or, let's just say, high. Interest rates in America are probably as high as they're going to be Someway through the year in 2024, we should expect interest rates to start coming down. Whether they come down in the first three months or the first six months or the last six months, who knows.
Speaker 1:Don't get fixated on predictions. What you need to know is falling interest rates will be very positive for investors in shares. It will initially be very positive for investors in all shares everywhere around the world, but it will be especially positive for emerging markets because when interest rates are high in America, it's basically like a giant vacuum cleaner. It just sucks up money from all around the world into the US and into short-term cash deposits where investors say to themselves with no real risk I can, I can't, I can lock in four or five percent a year in dollars without any worry. That's a really powerful force to draw money away from more risky markets. Firstly, shares are considered risky and then you add emerging markets to that and they're doubly risky according to investors. It's a lousy time to be an emerging market investor when interest rates are rising and high in America. Thank you when that trend turns. Understand that's. The really favorable thing that you need to understand about 2024, 2025 and onwards is investors are now going to say well, if I allocate money to emerging markets and interest rates start to fall in America, it means that their currencies the emerging market currencies are likely to start rising, they're likely to start strengthening and their stock markets are likely to do well, and so are their bond markets. All of those are really good news for emerging market investors and then for South Africans, who've just had years of zoom andomics and then these high interest rates all around the world. So I'm feeling a little bit more confident about stock markets in general and I think emerging markets will probably be quite rewarding to investors in the next year or three.
Speaker 1:We never know what happens with economics and politics, but don't fix that on predictions. Just understand that there is a massive tidal wave that's been drawing money out of the world markets and will now start to turn and pour money back into those markets. I think maybe that brings us nicely to understanding the politics and economics in South Africa, because I think there is always a lot going on. In 2024, we've got a national election in South Africa and we've got a national election in America. The only thing we know about that will be it will cause deep uncertainty. There will be politicians saying stupid things, doing stupid things and, even worse, promising stupid things to the electorate and, most worryingly and most oppressingly, the electorate will probably believe them and vote them in again.
Speaker 1:So in South Africa, the ANC are forecast to get really close to 50%. Whether it will be just over 50% or just under 50%, who knows. But that kind of instability, when a ruling party might lose majority, is very unsettling for global investors. So don't expect the South African markets to respond very well to the elections until everything is settled, until everyone knows what the new world and the new order looks like in South Africa whether that's a coalition or it's the ANC taking power again or some new party, who knows. But just to understand that the ANC politicians in charge in government will be doing a lot of things now, making a lot of promises, and most of them will be deeply unpopular and very concerning to investors.
Speaker 1:And I think NHI National Health Insurance is kind of enemy number one for investors, both in South Africa and globally. And then some other kind of almost want to say silly policies that the government will try and force through before the election to kind of show that they might actually be doing their job for a change. And I think, just to be clear on NHI NHI as a philosophy and as a principle is incredibly important. We know that the health care sector in South Africa is broken and it cannot carry on the way it is, thank you. Now, even for people who are on medical aides, they're finding the medical aid costs going up, you know, way more than the cost of living in other parts of life in South Africa, and so you know there will be a time when very few people will be able to afford a medical aid. So we need to find a better mechanism to make sure that more people in South Africa and ideally everybody in South Africa gets access to primary healthcare and access to reasonable healthcare at hospitals when they need it.
Speaker 1:But the answer is not what NHI is currently proposing, which is basically to break the private medical industry. That's really what they're going to do. They're telling us they're not and they're saying, don't worry, we've got this. But we need to understand that there isn't one thing that the government's got right, whether it be UIF, you know, transnet, escom, anything, any big organization, you know, none of them are working anymore. And so to try and build a mega organization which is supposed to take care of healthcare in South Africa, investors feel it's basically just going to be a root for corruption and really will just destroy private healthcare.
Speaker 1:So it's very likely that you know, if it gets passed all the way through Parliament and signed off by the president in a current form, it will be challenged in court cases everywhere. And you know we need to see what that looks like. I'm not too panicked at this stage because I don't think NHI passes constitutional master, so it will be redone. And if you're a cynic, what you would say is that you know the ANC wants to force through NHI now as a policy and then, if they lose the court cases, they can just throw up their hands and say, oh well, we tried. You know it was the courts. You know, rather than actually working some proper legislation and working with the private sector. They're not doing that at all at the moment, which is a bit of a risk If we jump to the US elections. Donald Trump is losing court cases left, right and center, and you know, most kind of interestingly, that he lost a court case in Colorado where the Colorado Supreme Court said that he's not able to stand as the Republican nominee in the country because he led an insurrection, and that only applies to the state of Colorado, it's not national. But the point is he's losing so many court cases in his personal capacity, in his business and then as the ex-president that you know, I think regulations are courts that say I'll probably be the biggest threat to his presidency. If it wasn't for that, there is a decent chance that he could actually have become president, and that would have been very comfortable for investors in American shares and very uncomfortable for everybody else in the world, and so I'm kind of hopeful that he loses too many court cases to lime to actually stand for election, I think just you know, if we look at the other things happening in South Africa, I think the energy crisis is real.
Speaker 1:You know, 2023 was the worst year in South Africa history in terms of load shedding and that's not a record you want to break again for 2024. I am very hopeful that there will be a lot of private power coming on stream through the year in 2024. And let's hope that by the end of the year, and certainly into 2025, that we will see so much private power taking up the strain from ESCOM that load shedding is at very low levels. And you know, if we see a lot of you know, kind of big structural form happening in ESCOM where the transmission grid gets some investments and more private power can be added to the grid, you know even better. But without relying on ESCOM doing a better job than it has, we are hopeful that we will see a lot better performance in the energy sector just because of our private industry. I think the same will apply to Transnet. You know private industry is going to get heavily involved in the ports and in the rails and start to fix Transnet, and that's really important. So I think that there will be some kind of nice tailwinds for a change.
Speaker 1:You know, both globally and then in South Africa, the elections are a concern just because they're uncertain, and you know, if I had to dream my scenario, it would be that, you know we end up in a coalition of the ANC and the DA, in fact, you know, as a kind of ruling coalition in South Africa, and while they won't agree on any political ideas, they might just agree on service delivery and hopefully, you know, sort out some of the corruption. So that would be my dream for 2024. But I guess to me, to see what that looks like, I think for investors, you know who kind of not had a great time in the last couple of years, you know investing often is just a patience game and sometimes it's just staying invested and letting your investments ride. That actually, you know that becomes the reason why you are successful. So if you're looking at your portfolio over 2023 and 2022 and wondering, you know, if things are ever going to get better, and shouldn't you just keep your money in a money market account? I think it's not a good time to be a cash investor. I think you know we're going to find interest rates coming down. We're going to see, you know, shares going up, bonds going up, the RAN might well strengthen as well, and you know all of that will be positive for investors here and equally, you know, if you own shares overseas, that might be a good time to be a share investor, but I would be a little bit skeptical, wary of the magnificent seven. Now when a company doubles its value or goes you know twice its, you know two or three times its value in a year, the likelihood that it does it again in the following year is very, very small. So just be patient. Make sure you keep rebalancing. You know cross cash, bonds, property shares. Make sure you've got money in South Africa. Make sure you've got money overseas. Don't get too fixated on kind of big scary predictions from you know the talking heads that want to create fear or greed. You know. Make sure you develop your own strategy for your circumstances and then just stay the course.
Speaker 1:And something new for the Honest Money podcast I want to give you a book to read for the year or if you're a bit of a reader, then maybe just for the month. It's my favorite book of the moment. It's by an author called Morgan Hassell. His first book that was really brilliant was called the Psychology of Money and I think his follow book and I'm just going to read it to you because I don't want to mess up the title. It's called the Same as Ever and I think it's, you know, possibly even better than the Psychology of Money. So do yourself a favor, go get that book.
Speaker 1:You know, just understand how our brains kind of, you know, drive us to make good decisions sometimes, but very often drive us to make very bad decisions, and how we get sucked up into the cycle of fear and greed, which is a permanent kind of human state. And you know, often the trick to investing is don't get sucked up into the madness, just stay the course and, you know, plot your own way forward. So that's how I'm going to wrap up for this podcast. I'm really hopeful that 2024 is going to be a much better year for all of us than we had in 2023. For some reason for me I said it at the end of the year that 2023 felt like the longest decade I've ever had, and it was only a year. But I think that that's likely to turn. So I wish you a very safe, very healthy and very prosperous 2024. And thank you for listening and I hope we're going to give you a lot more good content for you to enjoy.