Global growth has held up stronger than expected in 2023, bolstered by the especially resilient US economy. However, the positive momentum in the global economy is likely to trend lower in 2024 given that China, another key engine of global growth, is facing headwinds from weak domestic demand alongside a slow recovering property market and deflationary backdrop. Given the market’s current base case for a US soft landing, a shallow recession remains probable over the next 6-12 months says Eastspring Investment in its monthly review of the markets adding that growth is likely to decelerate from here as the balance sheets of US corporates and households remain strong.
Additionally, Eastspring adds the Fed has likely built sufficient firepower in terms of its progress on quantitative tightening (QT), to put them in a strong position to better navigate any risk of recession.
Inflation: Based on current trends, it seems that global inflation has likely hit its peak and the disinflationary trend remains intact. The MAPS team believes that the disinflation trend is likely to persist into 2024. However, the investment house notes that the US core PCE (personal consumption expenditures), the Fed’s preferred measure of inflation, remains some ways from its 2% target.
Monetary Policy: DM central banks are likely already at the end of their respective rate-hiking cycles, especially on the back of the Fed holding its key rate steady in December while indicating potentially three rate cuts in 2024. The MAPS team believes that as inflationary pressures ease, global DM rates will likely trend lower. However, the investment house remains cautious about declaring victory over price increases too quickly. Although much attention is now on the Fed pivot, significant policy easing is unlikely to transpire without a recession.
Key Risks
Inflation: Current trends show core inflation in developed market countries has generally been moderating, though we remain wary of factors that may still reignite inflationary fears. For example, the US job market remains relatively strong and voluntary crude oil production cuts by Saudi Arabia/Russia may persist. And more recently, the Red Sea crisis may contribute to higher shipping costs and insurance premium over time.
Geopolitics: Investor sentiment continues to be affected by rising political risks and social instability; complacency on war risks is ill-advised. The team continues to monitor updates on the Gaza-Israel Crisis, Russia-Ukraine Crisis, Taiwan Straits Conflict, etc
Political Elections: Election outcomes in Taiwan, India, and the US, among others, are crucial to monitor as they can result in significant policy changes that can impact financial markets and increase volatility.
Robust US Growth: The relatively strong US consumer and tight labour market remain key to the resilience of the US economy and a potential soft landing scenario, as the propensity to spend remains relatively high. This upside growth risk may challenge the MAPS Team’s 12-month investment preference for high quality, safe havens.
Equities: Global equities continued to rise in December, with sentiment supported by the ongoing optimism that global central banks will cut rates sooner than previously expected. Softer inflation data and more dovish messaging from the Fed further supported sentiment. The US 10-year Treasury yield ended the year at around 3.8%, significantly down from its mid October 2023 peak of almost 5%. All major markets posted positive absolute returns (on a USD basis). The exception was China which declined on continued weak economic data and lack of meaningful government support. India notably outperformed, returning 8.1% (on a USD basis), with growth coming in at a better-than-expected 7.6% year-on-year for the September quarter.
