HUB EXCLUSIVES PANEL DISCUSSION – MAJOR EVENTS FOR THE YEAR AHEAD
Panel discussion, hosted by Cherry Reynard, with:
Adam Darling, Investment Manager, Fixed Income, Jupiter Asset Management
Neil Birrell, Chief Investment Officer, Premier Miton Investors
Sree Kochugovindan, Senior Research Economist, abrdn
Richard Carlyle, Investment Director, Capital Group
2023 has been dominated by speculation around inflation and interest rates. This is likely to continue into 2024, but there are other macroeconomic factors that could play an increasingly role in financial market performance – from elections across the world, to a US recession, to fractured geopolitics. Which are likely to be the most important in the year ahead?
It is a big year for elections. While the US presidential election and the possible return of Donald Trump are likely to weigh heaviest on market sentiment, at least 64 countries, representing just under half the world’s population are going to the polls during the year. Another consequential election could be that of Taiwan, where pro- and anti-China candidates are pitted against each other.
Richard Carlyle, investment director, Capital Group, says historically elections in emerging markets have been more impactful than those for developed markets, but this US election could be different: “If we get President Trump #2, there will be a number of things we have to analyse. Number one is relations with China, and implications on inflation from any interruption in trade. Also, if Russia/Ukraine is still ongoing this time next year, could the withdrawal of US support for Ukraine have an impact on the oil price?”
Adam Darling, investment manager, fixed income at Jupiter Asset Management, is concerned about the potential impact on the treasury market. “In the US, the scale of the budget deficits has become so enormous, it is feeding into sentiment. There are concerns that there aren’t going to be enough buyers for government bonds with the scale of the deficits that are appearing.
He believes politics will be front and centre for market sentiment next year. Particularly important will be the behaviour of longer-dated bonds. He adds: “Do we get another panic around the steepening of yield curves?”
Geopolitics
2024 has seen significant geopolitical disruption, with crises emerging in the Middle East, while the war in Ukraine continues. It is difficult to see a resolution to either of these conflicts in the short-term and the next 12 months have the potential to add more, with elections around the world. Taiwan may be a particular pressure point.
Neil Birrell, chief investment officer, Premier Miton Investors, believes the key vulnerabilities are in commodities markets: “Companies can move on quite quickly, find new supplies and new sources of energy, but there can be ongoing effects. The war in Gaza has brought expectations of spiking raw materials prices. This hasn’t materialised yet, but could be a problem given that a resolution appears unlikely.”
Hard, soft, no landing?
The rally in financial markets in the last two months of 2023 suggests that investors are now firmly expecting a ‘soft’ economic landing for the US economy. Employment and consumer data has held up, and GDP growth has outpaced expectations. Sree Kochugovindan, senior research economist at abrdn, says: “The path to a soft landing seems to have really widened given the data flow that we’ve seen over the last six months. Q3 growth has been not just resilient, but actually quite strong.”
“We do think there’s been a delay in the pass-through of monetary tightening. It’s very difficult to see how we don’t slip into a recession next year, probably around the second or third quarter. That timing has been delayed due tos a number of different factors, but key has been the savings buffer in the US. That stock of savings now been run down and this is likely to feed into household spending.” She adds that payrolls growth is still quite resilient, but is slowing.
There is a question over whether a hard landing is underpriced by markets. Certainly, there are economists who believe the major economies have yet to feel the full force of interest rate rises and there could be a nasty shock ahead. Carlyle says: “A hard landing is certainly lowly priced by markets, but a 2-3% decline in GDP with rising US unemployment looks quite unlikely. So it’s lowly priced, but correctly priced. The alternative is to say that the Federal Reserve is going to get the management of the economy wrong and that feels punchy, given its track record.”
His view is that markets are likely to be supported by strong earnings growth for US companies, expected to be around 12-13%. He believes a modest recession is likely, but markets will look through it towards a recovery. “As a result, we struggle to be too bearish on US equities. A lot can change, but earnings growth is on the way and will be supportive.”
China
The final important area may be China. Its recovery has been disappointing in 2023, and the lack of any significant stimulus package has also kept investors bearish on the world’s second largest economy. If China were to revive in 2023, it could be a game-changer for global market sentiment.
Darling says: “It feels like China is at a turning point. The Chinese government has admitted that the economic model has to change. The old policy of enormous infrastructure spending and fixed asset investment has reached the end of the road, and that’s not a surprise. It is now such a large economy.
“China’s emergence from Covid was an enormous disappointment and that’s been reflected in the price of commodities, emerging market equities and its economic data. We keep hearing talk of stimulus, about how the government is pushing very hard to redirect investment into sectors that are more focused on consumption and exports, but it’s not coming through in the data.”
China’s weakness is a factor in Darling’s view of cooling inflation and falling rates in the year ahead. He adds: “We just don’t think that China is capable of the kind of growth that we’ve seen from it in the past. Post-financial crisis, China rebooted the world. If we have a recession next year, it will be interesting to see what part China can play in getting the world economy ticking again.”
There will be many moving parts in the year ahead and the elections are likely to provide a noisy backdrop to markets. However, there is little to disrupt the benign earnings picture, which should provide longer-term support for equities in 2024.
