Higher for longer

On uptrend: Traders work on the floor of New York Stock Exchange. The US equity market, which was last seen at a fresh record high, is expected to continue its ascent in 2024. — AFP

NO, it is not another call that global interest rates will be held up higher for longer – a message that has continuously been communicated by the US Federal Reserve (Fed).

On the other hand, it is a call that the US equity market, which was last seen at a fresh record high, is expected to continue its ascent in 2024.

The Dow Jones Industrial Average may hit 40,000 points in the year ahead; the S&P 500, by consensus indicator, is expected to rally past the 5,000-point mark; while the Nasdaq 100 may even pass the 20,000-point psychological barrier over the next 12 months.

As the dust settles for the year, it is an opportune time to reflect on the global economy and markets, as well as what to look out for next year.

First, the story of 2023. The year got off the blocks with renewed optimism that the global economy was poised to record steady and stable growth, while the interest rate upcycle seen over the past 18 months will likely come to an end as inflation prints were expected to ease from the accelerated pace seen in 2022.

The plus point was also about China’s reopening theme that could lift global growth considerably. Nothing of the sort happened.

On the contrary, rate hikes were very much the order of the day as the Fed raised the benchmark Fed fund rate (FFR) to its highest level in 22 years. Higher for longer was the theme as core personal consumption expenditure (PCE) data remained stubbornly high.

China’s reopening theme quickly fizzled out as early signs of revenge spending were quickly deflated by worries of its property market slump and falling external demand.

As the year comes to a close, sunny days are ahead as inflationary pressures have eased, while central banks are beginning to sound dovish.

The International Monetary Fund’s global gross domestic product (GDP) forecast for 2024 is now at 2.9%, a tad lower than this year’s estimate of 3%, which is a much better performance than its early January 2023 forecast of 2.7%.

The main driver of growth has been, surprisingly, a resilient US economy, which expanded by 2.4% for the first nine months of 2023, while China surprised the market with growth of more than 5.2% for the same period.

For the United States, growth has been driven by falling inflationary pressures as well as decent wage growth and a resilient US labour market, which drove consumer confidence and spending.

Recent economic data points out that China too seems to be favourable as external trade has improved, retail sales jumped while industrial production is on a steady recovery path.

The fear, as far as China is concerned, is the slowdown in the real estate market as it will take a while before confidence returns.

Hard or soft landing?

According to Bank of America’s latest Fund Managers’ Survey, global recession/hard landing is now the No. 1 tail risk for markets with 32% of votes, surpassing interest rate and inflation anxiety at 27% of those surveyed.

For now, the consensus view is that the United States will not enter into a recession in 2024, as the economy is poised to register a slower economic momentum with a modest growth of just 1.4%, as envisaged by the Fed in its latest assessment of the US economy.

Inflation too is expected to ease, with core PCE averaging 2.4% next year and near the Fed’s ultimate target of 2%.

Recession probability, as predicted by the US treasury spread, was at 51.8% last month and this is expected to ease further although the 10-year minus the three-month US treasuries remained deeply in the inversion zone for the longest time in history, that is, since October 2022.

That spread was last seen at 151 basis points and as the long end of the US treasury curve drops, the shorter end is expected to mirror the FFR for now, resulting in severe divergence.

Increasing geopolitical risk

While tension in Ukraine remains, the stand-off between Palestinian and Israeli forces is an added dimension to the geopolitical risk that the world is facing with no clear resolution in sight.

However, interestingly, the tension in the Middle East did not cause a spike in oil prices. To the contrary, oil was recently seen at a level where it was six months ago but has since recouped some losses to trade just below the US$80-per-barrel mark.

Election fever

According to a JPMorgan report, the year 2024 is a big year for general elections, with some 40 countries representing over 40% of the world’s population and GDP scheduled to go to the polls, including the United States, Taiwan, India and Indonesia.

Whether former US president Donald Trump and current president Joe Biden will slug it out for the second time is left to be seen, but in either case, campaign promises will likely be the main theme with Trump’s slogan of “Make America Great Again” overshadowed by its multiple legal troubles.

A Trump win will likely see tougher immigration laws and a return of a trade war with America’s No. 1 nemesis, China.

Riding on key macro themes

As the outlook for the year is being written, the key 10-year and three-year US treasuries have rallied strongly to the extent that yields on both the benchmark and long bond papers are approximately 114 and 112 basis points lower than their peaks of 4.99% and 5.10% about two months ago, respectively.

Clearly, clever money has moved in fast in anticipation of a Fed rate cut, that will cause the longer end of the papers to rally strongly, thus giving investors the benefit of not only locking in the most-sought-after sovereign paper in the world at a very good rate but at the same time position strongly for capital gains.

The fixed-income space is expected to benefit from global rate cuts that are anticipated next year and investors should go into the asset class with an overweight position.

New techs – generative AI

Not many people saw how companies like Nvidia Corp could be one of the biggest winners in 2023 in terms of share price performance, which is up by more than three folds, showing that being in the right technology eco-system could be a game changer provided the focus comes with clear deliverables and profitability.

As artificial intelligence (AI) is the next big thing since the Internet, the technology itself will be transformative as to how we work, live and play.

Companies involved in this space will be greatly rewarded if executed well and investors too can benefit from such stock rallies.

Currencies – the year for the yen

The year 2023 was one of the most punishing years for the yen as the Bank of Japan (BoJ) kept the key short-term benchmark interest rate at minus 0.1%.

The yield spread caused the yen to hit a 33-year low before investors started to re-price the fate of the US dollar on the basis that the Fed is done with raising rates.

The key to the dollar-yen movement will be the Japanese government’s ability to address key structural issues impacting the nation, which among others include the country’s public finances.

Investors are also raising bets that BoJ may even raise rates next year to provide policy space for future rate cuts too is fuelling a rally on the yen.

Other than the yen, selected Asian currencies also suffered from the US dollar rally over the past two years and this includes Taiwan dollar, Indian rupees and ringgit.

Exporters back in vogue

The year 2023 has been tough on export-based economies and that includes not only most of the Asean economies but also the manufacturing hub of the world, China.

After showing six straight months of contraction, exports for November expanded by 0.5% year-on-year, suggesting that the economic recovery is gathering momentum.

Year-to-date, Chinese cumulative exports and imports have remained largely flat as exports are up 0.3% while imports lower by 0.5%. It is expected that recovery in exports will continue in the months ahead as there are clear signs of bottoming out in certain sectors, in particular the semiconductor sector.

In summary, the year 2024 will be driven not only by interest rates and inflation rate expectations but also by heightened geopolitical risk that has already built up considerably this year.

Market volatility will remain a key feature across most asset classes as investors will be hard-pressed to interpret mixed economic signals given the tricky soft or hard landing scenario.

Despite the challenges, global equity markets will likely see a strong positive year, with the main US indices scaling new heights in 2024.

Next week, the column will dissect the key factors and outlook for the Malaysian economy, equity market and the ringgit.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.