[Market Updates] 2024 Quarter 1

Updated: Jul 3

In a blink of an eye, the first quarter of 2024 has come to an end and as usual, the unpredictability of the markets has once again humbled those who attempt to time the market.

Here’s what are two key developments in the first quarter of 2024 that investors should pay attention to:

United States: 3 Rates Cut Are Still Expected

Despite an “elevated” inflation rate in 1st quarter of 2024, the US Federal Reserve maintained its stance of having three rate cuts later this year while stressing the need to assess more “concrete” economic data before they commence their rate cut.

At the moment, the FOMC members are projecting for interest rates to come down to around 4.5% in 2024, 3.75% in 2025 and 3.25% in 2025. In the longer term, however, interest rates are expected to float around the 2.5% range which, in my opinion, is still much lower than the historical average (see below).

On a personal note, given that the current economic data points to a “soft-landing” and strong United States economy, I feel that there is simply no incentive for the Federal Reserve to lower interest rates so soon and risk a potential higher inflation rate situation.

That being said, as long as the inflation rate remains steady – even if it is at its current elevated levels – it is likely that the Federal Reserve will lower its rates later this year driven by political pressure and the need to mitigate the growth of the US national debt.

Why does this matter: looking at how the US (and also the global markets) had rallied in the first 3 months, I believe that much of the anticipation around a rate cut has already been priced in.

In fact, with a 12% return in a short span of three months, I feel that market participants are pricing for perfection such that should interest rate movements or earnings performances fall short of what the market is expecting, we may experience a sharp correction. As such, investors should be ready for higher volatility levels moving into the latter half of the year.

On a valuation level, much of the price action is supported – though disproportionate – by fundamental growth, as such I see no need to step in at the moment. However, should prices continue to rise at their current pace, I will step in in the latter half of the year to do a rebalancing and perhaps lower our exposure in the Western market.

China: Steady Performance but Unsteady Confidence

Despite delivering a 5% GDP growth in 2023 and setting another 5% growth target in 2024, investor confidence in China has yet to recover at the back of the continuous pessimistic headline narratives that mainly revolve around their ongoing property woes such as this:

Unlike the Western market where prices are priced for perfection, the market is pricing for a worst-case scenario when it comes to the Chinese market despite the ongoing efforts and policy support that the government has announced thus far.

Given the barrage of negative headlines that you would have seen and read, for this quarterly update, I’ll provide some potential positives that may come out of the ongoing property woes that could be a major contributing factor to the long-term economic growth of China once it is resolved.

Unlike the Western culture of doom spending, the Chinese – or Asians in general – practice a more conservative (but destructive in the short run) behaviour of doom saving. Given the ongoing property woes coupled with recent COVID-19 lockdowns, China households have been saving more than they did pre-Covid.

The silver lining of such a trend largely depends on how Chinese consumer behaviour will turn out to be in the future.

With a smaller percentage of their wealth being tied to property, what is missing in the Chinese economy today is a “substitute” from which the free savings can flow. Most of the time, such substitution comes in the form of either higher consumer spending, higher household stock market participant rates or both.

All that being said, for the substitution effect to materialize, it is imperative that domestically, consumer and investor confidence will have to first recover – which has been the focus of the Chinese government despite the poor and awkward global communication.

Why does this matter: While we do not have a direct position in China, our Asia fund is and will continue to be heavily influenced by the ongoing developments in China given that China, Hong Kong and Taiwan account for a decent proportion of any Asian fund.

That being said, a steady recovery in the Asia market cannot occur without a steady recovery in the Chinese market which is why investors would have to pay close attention to how the situation in Asia pans out, both fundamentally and speculatively.

The conclusion that I can draw as of now is that, fundamentally, I do not foresee many issues with the long-term growth prospect in Asia but speculatively, I doubt that the market prices will recover anytime soon as investor confidence is still absent leading to low demand for Asia share and hence the ongoing depressed share prices and valuations.

In the long run, however, my confidence and hence investment position in Asia remains unchanged. I still strongly believe that the future of global economic growth will still be found in the Asia market given that we are structurally positioned for growth to materialize.

Long Story Short

Price actions aside, the fundamental developments in the major broad-based economies that we are invested in have been quite positive. As compared to 2022 and 2023, there is a greater certainty of stable recovery and growth in the short and medium term.

If there’s anything that could derail the positive fundamental developments that we’ve seen thus far in 2024, that will either be a systematic failure in the US (plausibly driven by the commercial real estate headwinds that had surprisingly received little coverage thus far) or a further escalation and wider global involvement in the ongoing Russian-Ukraine, Isreal-Hamas and more recently China-Phillipine conflicts.

To end off, if you have been investing since 2020, you should have learned by now that it is futile to attempt to time the market. Any price actions in the short run are driven by nothing but speculation which is impossible to account for or rationalize on. The only way we can ensure our success when it comes to investing is to focus on fundamentals and avoid overpaying for our investments.

This is what we’ve been doing and this is what I will continue to do for our investments moving forward. Investors who are unable to stomach the volatility should reconsider investing completely as no instrument will be able to deliver the performance you need if you can’t sit through the ups and downs of the market that comes with ALL financial instruments that have been securitized.