The new year will offer plenty of surprises
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As we enter 2024, a convergence of robust economic activity and waning inflationary pressures has shifted the prevailing market narrative towards the likelihood of a soft landing. The past year has been marked by unforeseen developments, deviating from the trends anticipated by many. Contrary to widespread predictions, the expected recession in the US did not materialize. Economic growth showcased remarkable resilience across global economies, surpassing projections. Additionally, inflation, which had surged to multi-decade highs, has since subsided.
Against this backdrop, international markets have made a significant recovery, regaining more than half of the lost ground from the market’s peak in late 2021 to the low point in October 2022. The global economy’s performance in 2023 not only met but exceeded the most optimistic forecasts. Predicted global GDP growth is set to surpass consensus estimates from a year ago by 1 percentage point worldwide and by 2 percentage points in the US. Moreover, core inflation has decreased from its peak of 6% in 2022 to a consecutive decline to 3% in economies that underwent a post-Covid surge in prices.
Despite favorable indicators in growth and inflation for 2023, concerns about a potential recession persist among forecasters, and this cautious stance is justified. It is essential not to become complacent, especially given that the median forecaster still assigns a 50% probability of a recession within the next 12 months. Nevertheless, my optimism for 2024 remains intact, driven by the belief that central banks, in their efforts to manage inflation, will endeavor to sidestep a recession. Notably, emerging market early adopters like Brazil and Poland have already initiated policy rate cuts, signaling a trend likely to continue. While the scope for preemptive easing in developed market economies may be limited, there is a clear indication that central banks stand ready to pivot towards rate cuts if the growth outlook significantly deteriorates. An analysis of past hiking cycles underscores the fact that major central banks are twice as likely to cut rates in response to downside growth risks, particularly after inflation has normalized to sub-3% rates, highlighting the importance of this strategy as an insurance policy against recessionary threats.
In the realm of developed market central banks, my anticipation is that the European Central Bank (ECB) and the Bank of England (BoE) will embark on rate cuts sooner rather than later, with a likely commencement in May 2024. This projection is grounded in the anticipated progress in inflation within the euro area and a less robust growth outlook for the UK.
In recent years, global inflation led major central banks, except in Japan and China, to aggressively raise interest rates. While short-term rates responded quickly, longer-term yields caught up later. Investors believe inflation will stay higher, prompting the rate reset. Despite agreeing with this view, I anticipate a near-term decrease in inflation. In the US, inflation dropped from over 9% to under 3.5%, with encouraging signs in service sectors. Globally, inflation is slowing, expected to approach central banks’ 2% target by 2024. Improved labor balance in the US resulted in slowed wage growth, and I foresee 2% inflation as a baseline, with investors expecting 2.0% to 2.5% over the next decade. This shift suggests more variability than the previous decade.
Looking ahead to 2024, the landscape appears set for diminishing interest rates and a rebound in corporate earnings, rendering cash a less attractive option. Despite expectations of a prolonged central bank pause, there are optimistic signals as economic resilience persists, albeit transiently. Encouragingly, signs indicate a tapering of inflationary pressures, both in headline figures and wages. The labor market is cooling, alleviating the intensity of cost-of-living concerns, with workers showing less eagerness to switch jobs for higher pay, particularly evident in the US and anticipated to extend to Europe. With the interest rate reset concluded, it’s a prudent time to lock in yields. The pivotal question now centers on the strategic allocation between fixed income and equity in this evolving financial landscape.
AI stocks
Is 2024 the year for AI stocks? It may seem like the train has already left the station, with the most prominent beneficiaries of the generative AI revolution experiencing substantial market cap growth in 2023. However, as we enter the next phases of AI buildout, there are still potential opportunities for investors. It’s certainly not too late to tap into the exponential growth of artificial intelligence. While mega-cap tech leaders offer reliable exposure to the AI trend, sectors such as semiconductor equipment, robotics, drug discovery, and cybersecurity stand out as clear beneficiaries of the forthcoming integration of AI into everyday business and personal lives. Ultimately, aligning investments with individual goals remains paramount.
Oil above $100
In 2024, it is anticipated that Brent crude oil prices may trade above the $100 mark, contingent upon crucial geopolitical factors influencing the market. These factors encompass heightened tensions in the Middle East, such as attacks on vessels in the Red Sea and potential escalations from Iran. Additionally, the ongoing dispute between Venezuela and Guyana poses a potential threat to oil production, potentially resulting in price increases. There is also the possibility of shifts in OPEC+ strategy, involving increased oil production, which could lead to temporary challenges for energy companies but offer greater flexibility in the future.
Fitch Ratings has adjusted its price forecasts higher for oil in 2023-2024, as well as for natural gas in Europe for 2024 and 2026. The agency attributes these revisions to OPEC+ maintaining stringent control over supply volumes. The oil market experienced fluctuations in 2023, with both price increases and declines influenced by various economic and geopolitical factors. These include the turbulent economic recovery in China, the Israel-Hamas conflict, OPEC+’s decisions regarding oil production volumes, and the impact of the US on the market.
Starting in the summer of 2024, oil prices are expected to fluctuate above the $100 per barrel mark for a significant part of the year. This forecast is based on the anticipation of a slowdown in raw material demand amid a complex global economic situation.
India’s economic triumph: A beacon of global prosperity
“The Indian economy will double in size by the end of the decade” – Jim Reid, Deutsche Bank
India is poised for an extraordinary economic resurgence as it approaches elections in April, with Prime Minister Narendra Modi seeking a third term. A historical economic powerhouse for over a millennium, India’s narrative is shifting positively, fueled by robust factors that promise to reinstate its global prominence.
India’s economic strength is underscored by its remarkable 8% real GDP growth rate over 15 years preceding the pandemic, a testament to its resilience and dynamism. With a youthful population forming a demographic dividend, India stands as a beacon of innovation, investment, and increased savings. The nation’s substantial population becomes a strategic advantage, offering economies of scale and making it an appealing destination for global businesses implementing the ‘China+1’ strategy, a plan that encourages companies to diversify their supply chain and manufacturing activities away from China.
Challenges on India’s path to economic ascension are seen as opportunities for positive transformation. Embracing trade globalization, expediting privatization, and implementing transparent tax reforms are steps that signal a commitment to sustained growth. As the world turns its attention to Asia’s renaissance, India’s emergence as a genuine economic powerhouse appears not just plausible but a harbinger of global prosperity, marking a triumphant chapter in the global economic narrative.
China’s strategic economic shift: Even more stimulus
China is in the midst of a profound economic transformation, shifting from a sole emphasis on growth metrics to a more nuanced expansion strategy. Projected to close 2023 with a growth rate slightly above 5%, China’s recalibration of policy stimulus aligns with broader visions encompassing national security and income equality, recognizing challenges like demographic aging and geopolitical complexities. Looking ahead to 2024-25, deleveraging emerges as a central growth determinant, presenting challenges for Chinese assets post-real estate consolidation in 2021. Fiscal policy maintains moderate expansion, targeting a 3.4% headline deficit.
Despite initial bearish sentiments from global investors in 2023, influenced by concerns over worsening debt and property markets, the outlook for Chinese assets in 2024 hinges on initiatives aimed at boosting lackluster growth. There are cyclical weaknesses and concerns over China’s debt burden, although evidence suggests that manageable debt and fiscal expansion facilitated by monetary easing could potentially lead to a sustained rebound in Chinese stocks in 2024. The ongoing structural transformation, focusing on ‘hard tech’ and industrial migration to interior provinces, aligns with China’s broader policy agenda, reinvigorating investment growth in high-value manufacturing and high-tech industries. While China’s post-Covid economic recovery has been delicate, the structural transformation and aggressive fiscal expansion present long-term investment themes that mitigate cyclical challenges.
However, with the Chinese economy’s growth by just 5.2% in 2023, challenges loom. As an exports-driven economy, slow growth in the developed world and trade tensions have impacted the manufacturing sector. The domestic real estate sector continues to grapple with recovery, and Chinese consumers are navigating a ‘balance sheet recession’, prioritizing debt reduction. The limited stimulus measures offered in 2023 have provided little impetus for significant growth, and a much larger fiscal boost may be necessary. The government’s initiatives and the ongoing deleveraging process may keep economic growth subdued at around 4% in 2024, although there’s potential for positive surprises. The lack of inflationary pressures allows room for further fiscal and/or monetary stimulus, and the focus on ‘Common Prosperity’ underscores the commitment to long-term structural reforms, potentially opening up fresh opportunities for investors despite the current challenges.
Russia’s economic outlook for 2024: Navigating challenges with positive growth trajectory and ruble dynamics
Entering 2024, the Russian economy faces a spectrum of inflationary challenges, spanning both short-term and long-term dimensions. While demographic constraints and structural easing of budget rules contribute to the latter, short-term risks involve credit market overheating and ruble depreciation. Despite these challenges, there are positive indicators, with GDP expected to grow by 3.4% in 2023, surpassing optimistic forecasts. Encouragingly, real income growth and robust corporate profits are poised to alleviate credit risks. The population’s inclination toward savings remains relatively high, even with the recent rate hike. Although the ruble faced pressure due to a decline in the current account surplus, measures such as mandatory export revenue sales provided some support, and a potential ruble move toward 80-90 RUB/USD in 2024 is anticipated. While the Russian central bank is expected to maintain a rate above 10% in 2024, the positive trends in income and corporate profits may benefit equity market investment flows.
Bitcoin aims for $125,000 in 2024: Bullish trajectory despite market volatility
While a minor correction may occur in the first quarter, potentially influenced by interventions from regulatory bodies like the SEC or the Fed, it’s essential to attribute any fluctuations to typical market dynamics. Despite this, my optimistic projection indicates a potential surge for bitcoin to reach $125,000 in 2024. The cryptocurrency’s recent price stability, supported by technical indicators and positive market dynamics, suggests a consolidation phase around the $40,000 mark. Factors such as declining US interest rates and ongoing discussions about a spot Bitcoin ETF (exchange-traded fund) contribute to sustained institutional interest, fostering a conducive environment for bitcoin’s growth. My earlier projection of bitcoin trading around the $50,000 mark this Christmas has been partially realized as it hovers around the $45,000 level.
Positioned for an upward trajectory amidst market dynamics and potential ETF approvals, bitcoin demonstrates resilience and strength, as emphasized by my reiterated $125,000 forecast. This highlights bitcoin’s dominant position in the cryptocurrency market, indicating a path of continued expansion despite inevitable market challenges. However, it’s crucial to note that the journey will be accompanied by 20% fluctuations, both upward and downward.
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The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.
