The first day of January of the Gregorian calendar is widely celebrated as “New Year” globally. Scientifically speaking, this is just another point in ad infinitum; and no different from the millions of other similar points in the history of mankind. Nonetheless, we celebrate it as a new beginning, after every twelve Gregorian calendar months. The idea perhaps is to take a break from the routine and reflect on events of the past twelve months to review, reassess, revise, retreat a bit if required, and resume. It is common for people to take a pledge on this occasion, to take corrective measures for improving their lifestyles and behavior, and to set new goals for themselves.
In the financial markets also, it is a tradition to use this occasion to reflect on the market behavior during the past twelve months, outline the events to be watched over the next twelve months, and make an assessment about what may work best for investors and what may not.
Following the tradition, I have also reviewed the current conditions and shortlisted the following factors and trends to watch over the next twelve months. I believe that these factors and trends, inter alia, may materially impact the markets in the next twelve months and beyond.
Interest rates
At this point, it is a common belief that the current interest rate cycle that started in the Spring of 2022 has peaked in 2023, and we shall see a decline in rates during 2024. However, the views diverge about the trajectory of rate decline. A strong view is that to avert a recession, central banks may resort to accelerated rate cuts in 2024 and 2025. Other views include a calibrated rate-cut policy; a slow start in 2024 and rates bottoming much above the lows seen during the previous couple of cycles. A minority view is that consensus may be wrong about the rate trajectory and we may see higher rates for much longer than what the majority believes presently.
Investors would need to watch the trend in interest rates closely during 2024. An accelerated rate cut may mean (i) massive money flowing back to bonds; (ii) massive short covering in bond markets; (iii) USD strengthening; (iv) growth reviving in developed markets and (v) carry trade coming back in vogue as smart money travels to emerging markets in search of higher yields.
Disinflation vs deflation
2023 has seen significant disinflation in most developed and emerging economies. Most central bankers have either achieved or are closer to achieving their inflation targets. Global growth, especially in advanced economies, commodity-dominated emerging economies, and China has taken a hit.
Presently, many European economies are struggling with stagflation. Japan is witnessing positive real rates after a decade. US COVID stimulus has faded, leaving consumers vulnerable. Higher positive rates are impacting discretionary consumption and investment in many other economies.
It is to be watched whether the current trend stops with disinflation or pushes the major economies to a state of deflation. Particularly, since the strong deflationary forces like the use of artificial intelligence to replace semi-skilled and skilled workforce; aging demographics, dematerialization of trade and commerce, etc. continue to gain strength.
In case deflationary forces gain material ground, we may see the policymakers loosening money policy to recalibrate controlled inflation. This will see the Japanification of major economies like China, the US, and the EU. Emerging markets and independent currencies (e.g., Bitcoins) could be major beneficiaries in such a case.
Impact of AI
We are ending 2023 with companies like Google and PayTM announcing a material reduction in jobs as they replace workers with AI tools. This trend is likely to accelerate in 2024. It is critical to watch how businesses, households, and governments adapt to this trend.
The transition will indubitably be challenging as the redundancy of workforce and businesses increases. We may also witness a serious rise in the cases of cyber crimes and proxy wars. Plenty of regulatory frameworks would need to be recalibrated to meet the challenge. This process may also disrupt the businesses.
On the other hand, many businesses might experience tremendous productivity gains and a rise in profitability.
Geopolitical challenges
As we draw curtains to the year 2023, the world faces multiple geopolitical challenges. It is likely that in 2024-
(i) NATO may decide to end (or materially diminish) support to Ukraine, forcing a truce at Russian terms leading to end of sanctions on Russia and strengthening President Putin.
(ii) Arabs, aided by China, Iran and Russia, striking Israel in a proxy war against the US in a critical election year.
(iii) China entering Taiwan
(iv) Conflicts at Northern and North Eastern Indian borders as both India and Pakistan elect their new governments.
Global asset allocation rebalancing
The direction of the Indian markets could be significantly influenced by the global asset rebalancing in light of the change in interest rate trajectory, movement in USD and JPY, geopolitical tensions, disinflation/deflation etc.
The money managers might change their allocation strategies for EM vs DM, Equity vs Debt, China vs Japan, Physical Assets vs Financial Assets, Gold vs Bitcoin etc.
Presently the consensus is favoring accelerated rate cuts. Equity valuations and allocations (value vs growth) are congruent to this view. The margin for error therefore is low.
India’s growth sustaining the momentum
In 2023, the Indian economy surpassed the expectations of most agencies including the RBI and IMF. However, some key drivers of the above expectation growth appear tired.
· Private consumption growth continues to lag, while the fiscal constraints are now visible on government consumption expenditure.
· Poor global growth is likely to reflect on the exports and remittances in 2024, exacerbating the pressure on current account and INR.
· The erratic weather conditions may continue to challenge rural productivity and demand.
· Private investment has shown decent signs of recovery in 2023. Higher positive real rates may adversely impact this trend.
· The general elections scheduled in March-April, may also delay some public and private investment decisions.
· Bank asset quality improvement appears to have peaked in 3QFY24. The RBI has repeatedly cautioned about rising stress in unsecured consumer loans. A significant rise in service sector layoff might adversely impact home and vehicle loans also. Though, the probability of any significant deterioration in bank asset quality in 2024 is negligible, the growth and margins may certainly be impacted. This might limit the credit growth and hence the growth momentum.
Also read
2023: What worked and what did not
2024: A new paradigm unfolding
Next
2024: Market Outlook
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