Vijay Kumar Gaba

“Sir, I rise to present the Budget of the Central Government for the year 1962-63. The main purpose of this Budget is to place before Parliament an account of the finances of the Central Government for the current year and to obtain from the House a vote on account to meet the expenditure of the Government until the new Parliament considers the Budget again.” (Shri Morarji R. Desai, Minister of Finance, introducing the interim budget for the year 1962-63)

Tomorrow, the union finance minister will present an interim budget for the fiscal year 2024-25. An interim budget is necessitated due to the impending general elections, which ought to be completed by the end of May 2024. The union budget for the current fiscal year 2023-24 authorized the expenses of the union government till 31 March 2024. The incumbent government has the mandate to be in power only till the general elections are completed and a new government is sworn in. It is a convention of parliamentary ethics that the incumbent governments make policies and programs only for the period they are mandated by the electorates to be in power.

Therefore, conventionally, governments have avoided making any policy announcements in the budgets, if general elections are to be held within 2-3 months of the due date for the budget. The finance minister usually seeks a vote on account to get parliamentary sanction for the government expenses to be incurred between the beginning of the new fiscal year (1 April) and the presentation & approval of the normal budget by the newly elected parliament. Though ‘Vote-on-Account’ has been referred to as an “interim budget” by many finance ministers, it may not be the correct description of this exercise.

I considered this introduction necessary to put the discussions and narratives being run in media and markets, in right context. Even industry associations and professionals are making suggestions to the government and fueling speculations about tax reliefs, industry-specific incentives, tax-rate restructurings, etc. The whole narrative appears to be based on assumptions that the incumbent government does not care about the established conventions of parliamentary ethics and it may make populist announcements ahead of the general elections.

These assumptions are based on the breach of convention by Shri Piyush Goyal, the extant finance minister, in the interim budget of 2019. The government announced ₹6,000 direct cash transfer to farmers having up to 2 hectares of land. under Pradhan Mantri Kisan Samman Nidhi; ₹3,000 per month pension after 60 years of age to unorganized sector labor under Pradhan Mantri Shram Yogi Mandhan; hike in the standard deduction for salaried people, and some relief in TDS. These schemes entailed an additional fiscal burden of approximately rupees one trillion.

I would like to consider the 2019 interim budget as an exception rather than a norm. I am therefore not expecting any breach of parliamentary ethics in the 2024 interim budget. I shall watch the interim budget only for two data points –

(i)      Fiscal deficit for FY24, considering it was the first complete normal year post-Covid and Ukraine war-led disruptions.

(ii)     Nominal GDP projection for FY25, since this is used as a denominator for calculating fiscal deficit as a percentage of GDP; Tax to GDP ratio; corporate profit to GDP ratio, etc.

More on this tomorrow…

Not putting all eggs in one basket is perhaps one of the oldest risk management techniques. In the financial investment parlance, this is commonly called “diversification of portfolio”. Over the years this technique has worked well for investors in managing risk.

Yesterday’s post (China+1...rhetoric apart) evoked a rather aggressive response from some readers. They strongly disagree with my skepticism about China+1 strategy, at least in the short term (5-7yrs). Some of them claim to have already witnessed the stupendous results of this strategy for many Indian corporations.

Since my posts are mostly my personal views and observations, criticism does not affect me. I usually politely agree to disagree. I would thus avoid responding to criticism or the views to the contrary. Nonetheless, I may reemphasize my views as follows:

·         In the short-term (5-7 yrs) any business or investment strategy that assumes substantial decoupling of China from India’s trade specifically, and Western countries in general, may not be successful.

·         Presently, China+1 trade is confined to a few businesses (not sectors), where (i) China has explicitly implemented capacity shutdown, (ii) there are serious IPR violations or data security threats, (iii) Innovators have developed new markets and find it profitable to produce a part of overall production close to the new market, (iv) local government has offered meaningful incentives for building local capacities, and/or (v) a local partner has offered better terms/infrastructure as compared to the Chinese counterpart. All these situations are very normal business propositions and have little to do with geopolitics.

·         Increase in tariffs by the US post 2017 on the imports from China has reduced the US imports from China by ~5% (from 21.6% in 2017 to 16.3% in 2022). However, it has not changed the US dependence on China, as the new import partners have meaningfully increased their trade with China. (Read more)

·        In fact, China’s trade surplus with proxy countries (countries used by many countries to indirectly import from China) has increased meaningfully, implying some rerouting of trade. 

·         Insofar as geopolitics is concerned, it is important to note that China’s trade surplus with India and Western countries has not shown any meaningful change post Covid. Overall, China’s goods trade surplus has more than doubled since the pandemic, going from $400 billion a year to $900 billion (read more).

Also read China+1 ...rhetoric apart

https://www.investrekk.com/2024/01/china1-rhetoric-apart.html?m=1

Last month, in one of my posts (read here), I mentioned that “From the events of the past few years, it is evident that the era of peace and global cooperation, which started in the aftermath of two devastating wars in the first half of the twentieth century and flourished after the end of the Cold War in the late 1980s, may be coming to an end. In my view, the year 2024 will see a new paradigm unfolding in global economic, political, and geopolitical spheres. The new paradigm which would take a couple of decades to manifest fully, may inter alia see multiple axes and alliances emerging in the global order, competing with each other for supremacy. Consequently, global trade may get fragmented into multiple trade blocs.”

I also expressed a view that “The trend in the financialization of economies may reverse. Physical resource ownership and localized manufacturing may become the primary focus again.”

A team of the International Monetary Fund (IMF) analyzed the economic impact of the fragmentation of commodity trade, in a working paper titled Geoeconomic Fragmentation and Commodity Markets (Jorge Alvarez, et. al., October 2023). The conclusions of the research are pretty scary. The following are some excerpts from the IMF paper.

Concentration of Production

Unlike manufactured goods, the first stage of production of commodities depends on natural endowments that can be concentrated geographically. As a result of natural endowments’ concentration, there is a significant concentration of production at the country level, with the top three producers accounting on average for about 65 percent of the global output of agriculture, about 50 percent of energy, and about 75 percent of minerals commodities.

For minerals, production is concentrated both at the mining stage due to the geographic concentration of deposits, but often also at the processing stage, with a few countries (most notably China), having developed a strong comparative advantage through the deployment of capital intensive facilities, efficient technological solutions, lighter environmental regulations, and relatively cheaper labor.

Low Elasticities of Supply and Demand

Commodities exhibit low elasticities of supply and demand, particularly in the short run.

On the supply side, scaling up production often requires large investments and long permitting processes that can delay a supply response to price changes. For example, it takes on average 16 years from exploration to the opening of copper mines. Discovering new deposits is also costly and takes time.

On the demand side, many commodities are inputs for key technologies and products or are essential to household consumption, making them hard to substitute, and attenuating the demand response to price changes.

Trade Dependence

With production highly concentrated and demand often spread across many countries, commodities are heavily traded. Their homogeneity and fungibility also contribute to market integration. As a consequence, the share of production that is traded internationally across commodity types is consistently higher than the ratio of world trade to gross output. Across agricultural commodities, around 40 percent of output is exported, around 30 percent for energy and almost 50 percent for mineral commodities are exported. more than 80 percent of lithium, or potash produced cross borders, with the share increasing over time for most raw commodities.

Fragmentation and Commodity Prices

Events of the past few years suggest that the Western Economies and Russia/China led (or controlled) economies are drifting apart, getting divided into separate trade blocks. The Covid-19 pandemic exposed the fault lines of global manufacturing. If commodities cannot be transported between China, the West, and Africa, much of the modern manufacturing may halt. For example, Congo supplies two-thirds of the global Cobalt requirement. Disruption in supply chain could halt production in various manufacturing units that use cobalt as a raw material.

A model examines how much prices of 48 key commodities would change in the Western bloc and the Russia/China bloc if trading between the two blocks stopped altogether. In such an eventuality, the Western bloc would end up with a surplus of some commodities like iron ore or copper where there is more production than is needed in the region. Hence, steel prices would drop a lot in the West and rise dramatically in China, which undoubtedly would put an end to a lot of the growth in infrastructure and real estate in that country. Prices for magnesium and graphite, used extensively in the production of batteries and other renewable energy equipment as well as platinum, group metals, and rare earth metals would skyrocket in the West since we would be cut off from supply from China.

Prices of various commodities could move dramatically in the event of geopolitical decoupling of the West from China and Russia.

Obviously, the current geopolitical standoff is an invitation to mutually assured economic destruction for both blocs. The whole rhetoric of China+1; the isolation of Russia and China and the emergence of India at the expense of China appears fraught with danger.

Investors who are positioning for a secular growth of India’s economy over the next decade and the success of China+1 strategy may want to review their strategy in my view.

One of the key factors that may influence the performance of Indian equities in the current year would be how the global asset managers rebalance their portfolios in light of the changes in interest rate trajectory, movement in USD and JPY, geopolitical tensions, disinflation/deflation, etc.

2023 has seen significant disinflation in most developed and emerging economies. Most central bankers are well on course to achieve 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.

If deflationary forces gain material ground, we may see the policymakers loosening money policy to calibrate 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. The asset managers might therefore change their allocation strategies for EM vs DM, Equity vs Debt, China vs Japan, Physical Assets vs Financial Assets, Gold vs Bitcoin, etc.

Presently a majority appears to be favoring soft landing (no recession), gradual rate cuts (50-100 bps in the US), lower bond yields, and strong earnings growth. Equity valuations and allocations are congruent to this view.

In recent years, domestic equity flows have materially increased in India. The relative importance of the foreign flows has thus diminished. Nonetheless, for the overall growth of the Indian capital markets, global flows remain important.

Many global investment strategists have indicated their preference for Indian equities in recent weeks citing resilient economic growth, stable macro indicators, supportive political regime, and robust earnings growth momentum as the primary reasons for their positive view. This augurs well for the optimism over foreign flows and supports the positive view of domestic asset managers and strategists.

In this context, it may be pertinent to note that—

·         Emerging market equities have massively underperformed the US equities in the past decade. The current relative underperformance of emerging equities as compared to US equities is the worst in fifty years.

·         Emerging markets are about 40% cheaper as compared to their developed market peers, and the earnings momentum is likely to gather more pace.

·         The sharp rise in the EM discount relative to DM is driven to a significant extent by China’s low valuations. Ex-China, however, EM discounts are in line with the 10-year average. Currently, the price-to-earnings (P/E) ratio for the MSCI EM Index is trading at approximately 12x over the next twelve months, or slightly above its long-term average of 11.3x.

·         Within emerging markets, Chinese stocks have recorded their worst-ever performance. Currently, Chinese equities are at the lowest-ever level as compared to their emerging market peers.

·         Indian equities are presently trading at a significant premium to their emerging market, especially Asia ex-Japan, peers.

·         The earning momentum is expected to slow in India over the next couple of quarters, while Developed markets ex-US, offer attractive valuations.

“Economic efficiency” is one of the fundamental principles of economics. An efficient economy exists when every resource is allocated in the best possible way while minimizing waste and inefficiencies. The objective is to optimize productivity – producing goods and providing services at the minimum possible cost. A state of full efficiency is, of course, a theoretical concept. Nonetheless, by striving for this state economies, enterprises, and households aim to minimize waste and optimize the cost of producing goods and providing services.

The principle of ‘economic efficiency’ is at the core of the globalization of trade and commerce. Countries have their strengths regarding resources (man, material, money etc.), technology, infrastructure, policy framework, etc. Affording countries to produce goods and services according to their strength means optimum utilization of the available resources for the benefit of all the trade partners. However, local political and geopolitical considerations impede the achievement of full economic efficiency.

The globalization of trade and commerce in the past five decades resulted in a shift in the production of goods and services to Asia with abundant human and mineral resources. First Asian tigers and subsequently, China, Vietnam, Taiwan, and India became major producers of goods and services and Western economies took charge of research & development, technology, financial services, and logistics, etc. Even the production of fossil fuels, to support the rising consumption of energy, was outsourced to Middle East Asia, Australia, Africa etc. The trend has arguably contributed to a structural downward shift in global inflation, despite a relatively loose monetary policy regime.

The arrangement has worked well for most of the economies that opened up to participate in the process of globalization. In particular, the past three decades have been an era of overall peace and prosperity. However, logistic challenges and geopolitical developments in the past 3 years are threatening to reverse the trend. The question to examine is whether we are going to witness geopolitics and political ambitions triumph the globalization based on the principle of economic efficiency; or it’s just a passing phase.

Last week the National Statistical Office (NSO) released its first advance estimates (FAE) of the national income for the current financial year 2023-24. The growth in real GDP during 2023-24 is estimated at 7.3% as compared to 7.2% in 2022-23. This projection of growth is higher than the latest forecast of the Reserve Bank of India (7%) and professional forecasters (6.0 to 6.9%). Given the economic momentum, it is likely that growth for the next financial year FY25, currently pegged ~6.5%, may also get revised upwards.

As per FAE, the Nominal GDP (GDP at Current Prices) in the year 2023-24 is estimated at ₹296.58 trillion (USD 3.56trn), as against the Provisional Estimate of GDP for the year 2022-23 of ₹272.41 trillion. The growth in nominal GDP during 2023-24 is thus estimated at 8.9%, much slower than 16.1% in 2022-23.

It is critical to note that most statistical numbers relevant to the financial market investors are benchmarked to the nominal GDP. For example, corporate profits, tax collections, fiscal deficit, wage growth, and government borrowings are correlated to the nominal GDP. Market capitalization to GDP, a popular stock market gauge to assess overheating (or otherwise), also uses nominal GDP as a denominator. A slower nominal GDP growth therefore could impact many of these parameters adversely.

Some of the key points worth noting in FAE are as follows:

·         Consumption has slowed down considerably. Private consumption is estimated to be 56.9% of real GDP (58.5% in FY23 and 58.6% in FY22) and Government consumption is estimated to be 9.6% of real GDP (9.9% in FY23 and 10.6% in FY22).

Per capita real consumption expenditure in FY24 is estimated to be Rs70,065, a growth of 3.5% over FY23. This is one of the lowest real consumption growth rates in many years.

Per capita Real GDP is estimated to be Rs1,23,144 (USD1479), a growth of 6.4% over FY23.

Considering that per capita real GDP is estimated to grow at 6.4%, there is a deceleration in the propensity to consume. In FY23 per capita consumption grew 6.4%, higher than the 6.1% growth in per capita real GDP. It would be interesting to see whether the lower propensity to consume is due to a sharp rise in inequality of income or a higher propensity to save.

In nominal terms, there is no noticeable change in consumption as compared to FY23.

·         The share of Investments in GDP continues to grow. Gross Fixed Capital Formation (GFCF) is estimated to be 34.9% of real GDP (34% in FY23 and 32.7% in FY22).

In nominal terms, GFCF is estimated to be 29.8% (29.2% in FY23).

·         Trade deficit to widen. Exports will likely slow down to 22.2% of real GDP (23.5% in FY23) while imports may grow faster to 26.9% of real GDP (25.6% in FY23).

In nominal terms, however, imports are estimated to slow down to 23.7% of GDP (26.4% in FY24.

·         Agriculture crashes, manufacturing & construction lead the growth. Agriculture and allied sectors are estimated to grow 1.4% (4% in FY23). Rice production is estimated to fall 5.4%.

Manufacturing growth recovers to 6.5% (1.3% in FY23). Construction sector growth sustains at 10.7% (10% in FY23).

Trade, hotel, transports and communication sector growth slows down to 6.3% (14% in FY23).

It is noteworthy that nominal growth in manufacturing is slower at 4.4% as compared to 7% in FY23. WPI of manufactured goods is estimated to deflate -2% against 7.5% inflation in FY23.

·         Higher indirect taxes. In real terms, Net taxes on products are estimated to grow by 12.5% (10.1% in FY23)

·        
USD 5trn in 2029. If the nominal GDP of India grows at a CAGR of 7%, net of USDINR depreciation, India will be a USD five trillion economy in five years, i.e., by the end of FY29. A faster growth or USDINR appreciation can take us there a couple of years early, maybe.

 Wishing all readers, a joyful holiday season and a happy new year.

J. P. Morgan: Too early for a victory lap

As we head into 2024, a combination of solid activity and falling inflation has seen the market narrative increasingly shift towards the prospects of a soft landing.

•      We are a little more skeptical. Even though Western economies may be less rate-sensitive than in the past, we expect that the “long and variable lags” of monetary policy transmission are at least part of the better explanation for the economic resilience seen so far.

•      We think it's too early for the central banks to declare outright victory over inflation, and anticipate that rate cuts in 2024 are unlikely to pre-empt economic weakness.

•      We therefore think interest rates could be set to fall later than the market currently expects, but eventually they may also fall further than predicted.

•      We believe investors should focus on locking in yields currently on offer in the bond market. Targeted alternatives could augment the role that bonds play as diversifiers against different risks. In equities, potential pressure on margins warrants a focus on quality and income.

Goldman Sachs: The Hard Part Is Over

The global economy has outperformed even our optimistic expectations in 2023. GDP growth is on track to beat consensus forecasts from a year ago by 1pp globally and 2pp in the US, while core inflation is down from 6% in 2022 to 3% sequentially across economies that saw a post-covid price surge.

•      More disinflation is in store over the next year. Although the normalization in product and labor markets is now well advanced, its full disinflationary effect is still playing out, and core inflation should fall back to 2-2½% by end-2024.

•      We continue to see only limited recession risk and reaffirm our 15% US recession probability. We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows.

•      Most major DM central banks are likely finished hiking, but under our baseline forecast for a strong global economy, rate cuts probably won’t arrive until 2024H2. When rates ultimately do settle, we expect central banks to leave policy rates above their current estimates of long-run sustainable levels.

•      The Bank of Japan will likely start moving to exit yield curve control in the spring before formally exiting and raising rates in 2024H2, assuming inflation remains on track to exceed its 2% target. Near-term growth in China should benefit from further policy stimulus, but China’s multi-year slowdown will likely continue.

•      The market outlook is complicated by compressed risk premia and markets that are quite well priced for our central case. We expect returns in rates, credit, equities, and commodities to exceed cash in 2024 under our baseline forecast.

•      Each offers protection against a different tail risk, so a balanced asset mix should replace 2023’s cash focus, with a greater role for duration in portfolios.

•      The transition to a higher interest rate environment has been bumpy, but investors now face the prospect of much better forward returns on fixed income assets. The big question is whether a return to the pre-GFC rate backdrop is an equilibrium. The answer is more likely to be yes in the US than elsewhere, especially in Europe where sovereign stress might reemerge. Without a clear challenger to the US growth story, the dollar is likely to remain strong.

Morgan Stanley: Threading the Needle

Investors face tough choices in an imperfect world but can look for opportunities in fixed income while remaining cautious on emerging markets and commodities.

Investors will need to make deliberate choices in 2024, paying close attention to monetary policy if they want to avoid a variety of potential pitfalls and find opportunities in an imperfect world of cooling but still-too-high inflation and slowing global growth. 

Markets have already baked into asset prices the idea that central banks will manage a smooth transition to reduced levels of inflation—meaning there’s limited runway for increased valuations. But 2024 should be a good year for income investing, with Morgan Stanley Research strategists calling bright spots in high-quality fixed income and government bonds in developed markets, among other areas.

2024 is likely to be a “tale of two halves,” with a cautious first half giving way to stronger performance in the second half of the year.

For the first half of 2024, strategists recommend that investors stay patient and be selective. Risks to global growth—driven by monetary policy—remain high, and earnings headwinds may persist into early 2024 before a recovery takes hold. Global stocks typically begin to sell off in the three months leading into a new round of monetary easing, as risk assets start pricing in slower growth.  If central banks stay on track to begin cutting rates in June, global equities may see a decrease in valuation early in the year.

In the second half of the year, however, falling inflation should lead to monetary easing, bolstering growth. “We think near-term uncertainty will give way to a comeback in U.S. equities,” says Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley.  And Wilson expects earnings growth to remain robust into 2025: “Positive operating leverage and productivity growth from artificial intelligence should lead to margin expansion.”

Emerging-markets equities face obstacles, including a strengthening dollar and lackluster growth in China, where policymakers face the triple challenges of debt, demographics and deflation.

One global bright spot is high-quality fixed income. Yields on a broad cross-section of U.S. corporate and government bonds reached 6%, the highest since 2009. U.S. Treasury and German Bund yields are the highest they have been in a decade, and Morgan Stanley forecasts 10-year yields on U.S. Treasurys at 3.95%, and DBR at 1.8% by the end of 2024.

Bank of America: The Year of the Landing

A global shift to rate cuts: Inflation to gradually move lower across the globe, allowing many central banks to cut rates in the second half of 2024 and avoid a global recession. Head of US Economics Michael Gapen expects the first Fed rate cut in June and the central bank to cut 25 basis points per quarter in 2024.

The 3Ps = the 3Bs: Bull markets of 2024 will be the “3Bs”- Bonds, Bullion & Breadth. He believes the risk of a hard landing for the economy is higher-than-expected and that he awaits the classic combination of bearish investor positioning, recessionary corporate profits and easing policy—the “3Ps”—before he flips to being a full bull.

S&P 500 forecast to end 2024 at 5000, an all-time high: Bullish on equities—not because the Fed is expected to begin cutting rates next year, but because of what the Fed has already done and how corporates have adapted. EPS can and has accelerated as GDP slows, and reshoring has been identified as a tailwind by companies.

Expect Brent crude to average $90, commodities to restock: OPEC+ has been cutting supply since 2022 and will likely keep at it in 2024. Oil demand growing by 1.1 million barrels per day in 2024 as emerging markets benefit from the end of the Fed’s monetary tightening cycle. Yet Brent and WTI prices should average $90/barrel and $86/barrel, respectively. Recession, faster-than-expected US shale growth, and lack of OPEC+ cohesion are downside risks to oil prices. Lower rates should boost gold and lead to restocking in industrial metals.

Japan inflation persists: Expects an improvement in consumer spending and forecasts inflation to remain above consensus, which is a positive in the case of Japan. Our strategists expect progress with corporate reform, evidenced by the highest number of companies raising guidance in ten years.

Rate cuts and a peaking US Dollar are a positive for Emerging Markets: EM returns in the 12 months after the last Fed hike in a cycle tend to be highly positive and positioning is light across EM assets. China economic growth should stabilize. Our fundamental FX team is more bearish on the USD than consensus as US GDP growth slows and the Fed begins to cut rates.

Seek quality yield in credit: Rates, earnings and issuance will likely challenge credit in 2024, causing our credit strategists to prefer quality. They believe investment grade offers the best relative value in credit. Loans offer more carry than high yield (HY) and HY credit losses are unlikely to be lower than loans.

Slowing investment spend a drag US economic growth: The impact of fiscal investment programs should dissipate. Our US economists expect consumption to slow down but not to crash. While capex has secular tailwinds, cyclical headwinds also exist, as evidenced by fewer CEOs expecting higher capex over the next six months.

US 10-year Treasury yield should remain elevated: Not bullish on 10-year bond prices for several reasons: the US fiscal stance has deteriorated, as has its net international investment position, and duration/inflation risk have become riskier.

Policy uncertainty could rise as elections will occur in countries that make up over 60% of global GDP: Our Research team expects heightened policy uncertainty amid increasing political polarization. Fiscal consolidation becomes difficult, having implications for rates.

UBS: Soft landing more likely

We expect both equities and bonds to deliver positive returns in 2024. Slowing US economic growth, falling inflation, and lower interest rate expectations should mean lower yields, supporting bonds and equity valuations, while the absence of a severe US recession should enable companies to continue to grow earnings.

HSBC: A problem of interest

Since the Fed started hiking interest rates in March 2022, global liquidity conditions have tightened materially, bringing inflation down, but it has now raised risks of an adverse growth outcome in 2024. Markets are unprepared for this scenario and continue to assume a ‘soft landing’ – that inflation can dissipate without harming growth prospects. However, we expect a rise in recession risk in western economies, while in eastern economies, some parts of Asia could face growth challenges but still provide diversification benefits and a relative bright spot.

In the longer run, we believe a shift to a ‘new paradigm’ is underway, with inflation and interest rates somewhat higher than during the 2010s. Our preference in this environment will be for a ‘defensive growth’ approach which includes pivoting to higher quality markets. We also suggest ‘intelligent diversification’ strategies.

Lazard: Stark contrast to 2023

•      Rate hikes likely shifting to cuts as inflation falls to 2%.

•      The Fed engineering a “soft landing” avoiding US recession.

•      China sentiment improving despite the ongoing housing overhang.

•      The Eurozone and UK teetering on the brink of recession as sticky inflation precludes easing.

•      Japan exiting yield curve control and negative interest rates.

•      The Ukraine war dragging on and Western tensions with China ratcheting higher.

•      US elections becoming the focal point as a determinant of the geopolitical trajectory.

Invesco: Deploying cash

Economies have been more resilient than we expected during 2023 but we believe they are slowing. We also believe that inflation will decline, though less smoothly than in 2023, and that major Western central banks will start easing in 2024 Q2.

History suggests that once the Fed starts easing, it will move quickly. Defensive fixed income asset returns are likely to be boosted by high yields (or higher than for many years) and the decline in those yields that we think will go with central bank easing (implying bull steepening).

Risk assets may suffer in early 2024 as economies weaken and as we await clarity from central banks but we expect better performance as the year unfolds.

Assumptions:

•      Global GDP growth will slow and then recover

•      Global inflation will fall but remain above many central bank targets

•      Major western central banks start cutting rates during 2024 Q2 (but continue QT)

•      Long-term government yields will fall but yield curves will steepen

•      Credit spreads will widen in the US but be mixed in Europe, defaults rise

•      Bank loan spreads will be stable but defaults rise

•      Equity and REIT dividend growth will moderate but yield movements are mixed

•      USD will weaken as Fed tightening ends

•      Commodities will be mixed as the global economy slows and USD weakens

Deutsche Bank: Geopolitics and corporate uncertainty

Two big ideas – geopolitics and corporate uncertainty – pervade all the key themes that we present as our top ten for 2024. We elevate these two mega-themes as they are the key drivers underlying much corporate and investment decision making in the new year.

The big focus of 2024 will be the slew of elections around the world. We expect some volatility around these, particularly if markets become nervous about fiscal spending promises. But when we take a step back, the most important aspect of the elections may be observing any increase in populist views from both sides and examining how they may realign trade relations between countries.

For corporates and markets, the key point many investors underestimated in 2023 (at times, us included) was how long corporates would remain nervous as uncertainty remained high. That fact kept a lid on things this year.

In 2024, however, we expect more activity. Corporate uncertainty has dropped and there is greater visibility on the trajectory of economic and market indicators.

The year may still include an economic slowdown but that may not be the key thing that drives markets.

Also read

2023: The year that was

2023: What worked and what did not

2024: A new paradigm unfolding

2024: Trends to watch

2024: Market outlook and strategy