As 2023 draws to a close, brokerages and investment advisers are polishing their crystal balls and getting down to the business of predicting what is likely to happen in the financial markets in 2024. Around this time of the year, every economist and market strategist worth their salt set out to try and disprove John Kenneth Galbraith’s celebrated quip: “The only function of economic forecasting is to make astrology look respectable.”
But first, a round of applause for the markets in 2023, which have braved wars in Ukraine and the Middle East, a Cold War between the world’s two biggest economies, sluggish growth and slowing trade, volatile oil prices, high interest rates, tightening liquidity, a meltdown in China’s property sector, and climate change, with remarkable aplomb. That’s a long list of what could have gone wrong, and some would say if the markets can weather all that, they can take whatever is thrown at them.
The alternative takeaway, of course, is “Whew! That was close.”
This week, markets rejoiced as US inflation for October came in slightly lower than expected, leading to a swift conclusion that the peak in the Fed’s policy rate had been reached and cuts were expected in 2024. We asked whether this was the end of the “higher-for-longer” narrative. This FT article, free to read for Moneycontrol Pro subscribers, said it is “quite likely that the beginning of the subsequent loosening is closer than central banks are suggesting”.
Could this fall in inflation mark a turning point for the markets? Is it a pointer to what lies ahead in 2024? We bring you some of the insights gleaned from the latest reports of global brokerages and investment bankers.
Growth and inflation
Most forecasts say global growth will slow in 2024, as monetary tightening works its way through economies. But the slowdown is expected to be mild, because, as Morgan Stanley says, “inflation is falling with full employment, so real incomes are buoyed, leaving consumption resilient”. Goldman Sachs is even more bullish, pointing to 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.
But UBS says excess savings, which had supported consumption in the developed economies, will fade away and with “a large part of monetary transmission still ahead of us, it will be difficult to avoid a few negative quarters of growth”. Nevertheless, UBS, too, believes the global growth slowdown will be mild.
The trade-off is simple — inflation and interest rates will come down and be tailwinds but will that be offset by a slowdown in economic growth and earnings? Note that what matters for the markets is nominal growth, which could be much lower in 2024.
That is why Barclays warns “investors should be careful what they wish for: monetary policy may not turn accommodative unless the outlook meaningfully deteriorates”.
The fall in interest rates and lower growth is expected to lead to rate cuts in 2024. Fed Funds futures are pricing in a cut in the policy rate in May 2024 and cumulative cuts of around 100 basis points by December 2024. Interestingly, though, brokerages expect policy rates to remain relatively elevated even after central banks are done with rate cuts. For example, Goldman Sachs says, “When rates ultimately do settle, we expect central banks to leave policy rates above their current estimates of long-run sustainable levels.”
Goldman Sachs believes emerging markets (EM) are more likely to cut rates, simply because several of the early hikers — including Brazil and Poland — have already started doing that. Morgan Stanley, though, says EM central banks “will be caught in the crosshairs as high real rates in DM (developed markets) force delays to their normalisation path”, pointing to Indonesia, which was forced to raise rates even when inflation was falling, to defend its currency.
Over the longer term, interest rates are expected to remain relatively high, thanks to higher fiscal deficits, higher investment because of climate change and defence requirements. JPMorgan explains it well: “The transition to greener production and more resilient supply chains for strategic goods will require substantial public and private investment over the next decade. This increased demand for capital could put upward pressure on interest rates and the cost of capital generally.”
UBS is the odd one out, probably because of its more pessimistic view on growth. It says, “The market expects a Fed cutting cycle less than a third of a typical one, but we see a regular one panning out.” That means deeper rate cuts.
With the Ukraine and Israel-Palestine conflicts not spilling over to other countries, investors have heaved a sigh of relief. The events to watch out for, apart from the ongoing hot and cold wars, are the Taiwan elections in January, in which the election of a pro-independence candidate will certainly rock the boat and the US presidential elections in November 2024. Lazard says the US elections are “becoming the focal point as a determinant of the geopolitical trajectory”.
Commodities and China
Commodity demand should fall along with a weakening global economy. JPMorgan says, “We expect real commodity prices to drift sideways over the forecast horizon, on average, having less impact on the inflation outlook than they did a year ago.” Demand may be low but then so is supply.
JPMorgan adds, “We expect multiple supply disincentives to create a supply-demand mismatch for several years, adding modest upside pricing pressure to approximately 28 percent of the commodities in the BCOM (Bloomberg Commodity) index. As robust oil demand meets industry-wide capital starvation, a future supply deficit may result.”
As always, the outlook for commodities depends on manufacturing giant China and consensus expectations of long-term growth in China are gloomy, for reasons we all know.
Nevertheless, Lazard says sentiment on China has improved despite the overhang of the housing mess and Morgan Stanley says “more central government-led stimulus and reforms will likely only cushion the economy against continued housing and LGFV (local government financial vehicles) deleveraging”. Goldman Sachs puts it best in its headline: ‘Temporary Relief from China’s Multi-Year Slowdown’.
The question is: are falling interest rates and lower inflation supporting consumption already baked into equity prices? Barclays points out that “equities’ recent performance is consistent with a ‘no landing’ of the economy”, which implies an improbable sharp reacceleration of the economy from current readings.
It says, “Other indicators, which tend to lead earnings growth, suggest that global earnings are more likely to contract in the coming months” and adds that valuations are stretched, given the growth slowdown. Goldman Sachs, too, says markets are well-priced for its base case.
JPMorgan, however, points to higher margins as a comfort. It says, “Valuations function as a greater drag and margins function as less of a drag relative to last year.”
JPMorgan also has an interesting justification for the high valuations of tech companies. It says rival trading blocs are emerging globally and innovation, technology and data are increasingly viewed as strategic assets. It says, “Governments seem to have less appetite to break up market-leading big-tech firms, leaving the sector to operate as a “tolerated monopoly” – able to collect monopoly rents and thus command superior valuations.”
UBS once again is a contrarian, asserting that equity returns over the next year are very likely to be inferior to fixed income.
Fixed income and currencies
Views on the strength of the US dollar depend on where one sees US interest rates. Goldman Sachs says that without a clear challenger to the US growth story, the dollar is likely to remain strong. But UBS, which thinks US growth will be weak, forecasts a weaker dollar.
Goldman Sachs points out that the “value of bonds as a recession hedge should rise in a world where central banks cut interest rates to offset downside growth risk, especially as inflation falls further”. Bond prices should benefit when interest rates start coming down.
On gold, JPMorgan pencils in a "modest return premium of 40 bps relative to the BCOM index assumption to reflect gold’s elevated demand from central banks as well as elevated per capita gold consumption from large, fast-growing populations in India and China”.
The outlook for India
That India is a bright spot in the global economy is well-known and discounted by the markets and all the brokerages say it will remain so in 2024.
Barclays says, “In the current VUCA (Volatility, Uncertainty, Complexity, and Ambiguity) world, no other major economy has, over the coming years, the potential to deliver north of 6 per cent real economic growth with a high degree of macroeconomic stability (albeit nothing is ever guaranteed).”
It points to early signs of a pick-up in private capex. It adds that foreign portfolio inflows, including flows on account of the inclusion of Indian government bonds in the global bond index and domestic investment flows, coupled with overall healthy balance sheets, should gradually bring down the cost of capital in the country.
It says, “The two key risks to the Indian story in the coming year are sustained high oil prices and the central elections mid-2024.” Most analysts, however, are sanguine about the prospects of the BJP in next year’s general elections.
The Barclays report points out that “since the central elections in 1999, Nifty50 index returns have been positive in the six months prior to the date of election results announcement, as well as in the six months following. While never a guarantee, history therefore suggests that it pays to stay invested through such events”.
Morgan Stanley analysts expect RBI’s easing cycle to commence from Q2 FY24, on inflation moderating to around 5-5.5 percent in Q1 FY24 and remaining around 5 percent thereafter. They say, “We maintain our expectation of a shallow rate cut cycle of two rate cuts of 25 bps each.”
Brokerages expect growth to lead to buoyant government revenues, aiding the moderation in the fiscal deficit. Moreover, Barclays points out that “bond markets (especially sovereign bonds) are likely to see a boost in demand in 2024 as Indian bonds find inclusion in the global bond indices, triggering flows from foreign portfolio investors and potentially providing an additional nudge to lower yields in domestic markets”.
As a result, they add, “there is a compelling case to be overweight on Indian bonds and to add duration to the portfolio with a medium-to-long-term investment horizon (18–24 months)”.
As for Indian equities, they, too, should benefit from lower yields in developed economies and perhaps a weaker dollar, as has been seen in the past few days.
Barclays says domestic cyclicals such as infrastructure, capital goods, financials, and consumer discretionary appear well-positioned, as they should be the main contributors to earnings growth, going forward.
And, UBS says, “Indian equities continue to benefit from the household flows, as well as the lack of liquid alternatives within Asia, given foreign investors' negative sentiment on China and concerns around global cyclical proxies of Taiwan and Korea.”
Of course, it’s practically impossible, in these times of exceptional uncertainty, to make predictions a year ahead. Here’s another wisecrack from Galbraith: "We have two kinds of forecasters, those who don't know and those who don't know they don't know." And here’s Pink’s song about the cracks in the crystal ball.
But what these forecasts do tell us is about the consensus expectations that market players have. Any deviations from these expectations will trigger a reaction in the markets.
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Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
Weekly Tactical Pick, MTAR Technologies, Uflex, Ashok Leyland, Eicher, M&M, Muthoot Finance, Hindalco, Coal India, Zee Entertainment, Tata Power, Apollo Hospitals, Pidilite, Ami Organics, SAIL, Repco Home Finance, Galaxy Surfactants, EaseMyTrip, Power Grid
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