2024 Market Outlook: Slope Of Hope or Wall Of Worries

As the new year kicks in, here are three central themes to watch out for in 2024.

Global Markets: An Election Year

2024 will be a crucial year to watch for all stakeholders as it is the year when major economies and countries undergo their elections. In fact, 40 countries that account for over 41% of the global population and 42% of global GDP will be going on the polls.

Notable elections to watch include the following countries:

There are two implications of having a record number of elections in 2024 to investors.

For investors investing in global equities, we should prepare for higher volatility in 2024 as we deal with higher levels of uncertainty over how future economic policies will be shaped and also how geo-political relationships may improve or worsen.

For investors investing in Asian equities, we should prepare for a worsening sentiment over the “F*** China” narrative as political parties attempt to score political points by bashing the easy target – China. We’ve seen this happen in the 2016 and 2020 elections of which the anti-China sentiment will only get worse in the 2024 elections given the current geopolitical tension

That being said, investors should consume mainstream narratives with a pinch of salt as politicians do not often promise one thing to garner votes but do another after they are in power. Decisions should be made based on facts and not opinions.

US: Is The Recession Cancelled?

As the entire world anticipated the US and global economy to enter into a recession since 2022, those expectations had yet to materialize as the US economy had proved to be very resilient at the back of record-breaking consumer spending and a low unemployment rate.

That being said, the opinion on Wall Street is extremely divided at the moment as while it is true that the economic data on paper looks good, in reality, the situation on the ground does not seem to echo the insights provided by the data.

On one end, the analyst who believes that the recession is cancelled has formed their beliefs at the back of the following narratives:

the Fed appears to have won its battle against inflation and its tightening cycle is advanced
trouble in the banking system has been exposed (and seemingly addressed and priced in)
forward earnings estimates have started to stabilise and, in some cases, turn higher

On the other end, the analyst who believes that recession is merely delayed have formed their beliefs at the back of the following narratives:

the impact of higher rates has not been felt in the broader economy
US consumer strength is waning as consumption is now supported by debt, which is not sustainable in the long run without economic repercussions (see figure below)

As interest rates peaked in 2023 and 3 rate cuts are expected in 2024, I believe that 2024 may end up just being a consolidating year with high price volatility in between the months for both the US and Global markets. This is because while the economy may continue to remain resilient, valuations are once again back at an all-time high.

Even if a recession were to happen, it would probably be a technical recession (marked by 2 quarters of negative GDP growth) as opposed to a depressive recession with massive unemployment as it is highly likely that the central banks will bail the economy out should things turn south, especially in an election year.

Long story short, an economic slowdown is expected in the United States and the world but it is unlikely we will experience a plunge. As usual, the Mainstreet will feel the brunt of the slow down but the Wallstreet would rejoice over a lower interest rate environment.

Asia: Depressed Confidence, Improving Fundamentals

For Asia, 2024 may be the year that marks the start of a recovery as the region is looking to enter its sweet spot - a lower interest rate and weaker USD environment combined with a global economy that has proved to be more resilient than expected.

While the general investor sentiment and confidence are expected to remain depressed as a result of anti-China sentiment, the fundamentals of the majority of Asian countries are expected to improve at the back of the following factors:

Firstly, the trend of “Friend shoring” away from China will continue and even accelerate well into 2024 as a result of the impact of elections. This presents more opportunities for other emerging Asia countries such as Vietnam, India, Thailand, Malaysia, etc, which will provide a more balanced growth distribution across the countries within the Asia region.

Secondly, despite the disappointing economic data and existing headwinds in China, things are expected to turn around in 2024 as the government has finally stepped up their efforts in stimulating their economy to prevent further deterioration of economic condition after letting it run flail in their grand scheme of restructuring their economic growth drivers.

While some may view the measures thus far as a stopgap on the damage done by the property industry – which is true to a certain extent – it is also undeniable that the Chinese government has more room for both fiscal and monetary stimulus given that the country’s deflationary situation as compared to the western counterparts.

The key thing to watch for in China is the party’s intention and willingness to “bail” out their economy to restore both business and consumer confidence which has been the major drag on China's economic growth thus far in 2023.

Thirdly, as the global interest rates come back down and the USD weakens, emerging countries across the world are likely going to experience higher earnings at the back of a lower cost of borrowing and lower foreign exchange losses. This will help improve bottom-line earnings with or without top-line growth.

That being said, I expect Asia’s fundamental recovery will only be visible in the latter half of 2024 and possibly even in the first half of 2025. As such, as the fundamentals improve at the back of depressed confidence, investors may find themselves climbing a wall of worry which is characterized as improving market prices amid a pessimistic environment.

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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