10X Global Connect - October 2024

National Treasury’s 2024 MTBPS emphasised unlocking economic growth through infrastructure investment, supported by structural reforms and improved state capacity.

However, the Treasury’s budget projections tell a different story, with a cautious growth outlook of 1.1% in 2024 and 1.7% over the medium term, despite expectations of fiscal consolidation, stable inflation, and lower interest rates.

This conservative approach raises the projected debt-to-GDP ratio compared to February’s budget, setting a lower bar for potential positive surprises in the years ahead.

The sharp rate-hiking cycle driven by high inflation led to a positive stock-bond correlation in the U.S, meaning bonds failed to diversify stock exposure as both assets moved in the same direction.

Now, for the first time since 2021, before the rate hikes began, we’re seeing a return to a negative correlation between stocks and bonds.

This shift aligns with declining inflation and growing concerns about the strength of the U.S. labour market.

The renewed negative correlation boosts the appeal of bonds in a portfolio context, supplementing their attractive return outlook relative to equities (see below).

As both parties work to garner support in the lead-up to the U.S. election, policy proposals from Democrats and Republicans indicate that large fiscal deficits will persist regardless of the outcome.

The Democrats aim to increase social spending, while Republicans propose tax cuts - both likely leading to an increase in government debt to fund the deficit.

A “Blue” or “Red” sweep, allowing full implementation of either party’s policies, would significantly increase net debt beyond current CBO projections.

Questions remain as to how the market will respond to this substantial debt issuance—and whether it could prompt the return of the bond vigilantes.

Real (after-inflation) return expectations

Resilient U.S. economic growth has driven global bond yields higher over the month, enhancing the long-term return outlook for bonds despite recent cuts in short-term rates.

Return expectations for global growth assets remain constrained on both an absolute and risk-adjusted basis, favouring a higher allocation toward global bonds and cash.

While expected returns from South African equities are in line with historical levels, South African bonds present a more attractive option on a risk-adjusted basis, continuing to offer equity-like returns.

Asset Allocation

Given the relative return outlook across asset classes, the portfolio remains defensively positioned, with 65% allocated to growth assets.

The portfolio is globally diversified, with 35% invested in offshore markets, and a reduced allocation to the more expensive and concentrated U.S. equities.

The portfolio also maintains a high allocation to South African bonds, driven by their attractive long-term return outlook.