The world has witnessed a discernible tightening of global liquidity conditions since the US Federal Reserve initiated rate hikes in March 2022. This policy, initially aimed at taming inflation, now teeters on the precipice of potentially impeding economic growth.
As we stand at the threshold of 2024, the global economic landscape presents us with what can only be described as a problem of interest.
Throughout 2023, investment markets have behaved rather erratically — sometimes fearing a hard landing and other times assuming a soft or no landing scenario would come about. But as we look ahead to the new year, the conventional belief in a ‘soft landing,’ where inflation recedes without impacting growth, is now under scrutiny.
Our analysis reveals a heightened recession risk in the West and growth challenges in certain parts of Asia, necessitating a strategic, defensive stance.
In the year ahead, we anticipate a continuation of the decline in inflation, with the potential for US inflation to revert to 2% by the close of 2024 or the early months of 2025.
Despite a resilient economic performance in 2023, the outlook for 2024 appears formidable, characterised by softened labour markets, dwindling consumer savings, and lacklustre corporate profits. Foreseeing the first Fed rate cut in 2Q2024, we expect subsequent cuts to surpass market expectations throughout the year.
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Asia is a relatively bright spot
Amid the ongoing global challenges, Asia is a beacon of relative optimism. It continues to serve as a source of diversification for global investors, driven by pivotal economic themes. India, for instance, is poised to be among the fastest-growing markets globally, propelled by robust macro tailwinds and imminent elections in 2024.
At this juncture, a ‘defensive growth’ mindset is warranted among investors, given the heightened risk of recession in the West and potential disinflation. This strategic approach promotes selectivity in high-yield and private credit, focusing on lower volatility equity strategies, including those found in Japan, the quality factor, infrastructure, and real estate.
While history might not repeat itself, a Fed rate-cutting cycle can support emerging markets’ performance, just like in the early 1990s. The prospect of Fed cuts in the second half means that investors should keep emerging markets on their radar in 2024.
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As such, the credit market in Asia is poised for improvement, with India as a particularly compelling option due to the market’s high yields and declining inflation.
Bonds are back
As we navigate the economic landscape over the next 12 to 18 months, investors will continue to grapple with a new paradigm for the macroeconomy and investment markets. Caution will be needed when investing in US equities as earnings growth expectations for 2024 are over three times nominal GDP, and the market multiple now appears stretched relative to government bond markets.
The anticipated weaker economy and disinflation should also be a supportive environment for government bonds. In general, there are good opportunities in parts of global fixed income, which includes the US Treasury curve and UK Gilts, as well as in securitised debts. Within emerging markets, India and Mexico emerge as preferred bond picks.
Meanwhile, 2024 is also a much better year for Asian credit due to factors including global rates reaching their peak and most Asian economies performing well. Much of the Asian credit market appears to be high quality with compelling premiums compared to Western markets. Selected local bond markets, such as India, will likely ride a wave of positive cyclical, secular and technical forces, which could lead to strong, uncorrelated returns in 2024.
The overall macro dynamics favourable for Asia’s growth prospects are expected to cushion the credit market in this part of the world from defaults and downgrades while also allowing governments to support fiscal and monetary policy.
Asian bonds generally yield higher than those in the West, while most investors worldwide may be surprised by the high quality and low volatility characteristics — especially in the investment grade market available in Asian markets.
A ‘defensive growth’ mindset
As we focus on Asian equities, the outlook remains relatively optimistic. Factors such as compelling valuations, light foreign investor positioning, and stabilising earnings suggest a positive trajectory.
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Key highlights include the potential for a turnaround in the semiconductor and technology cycle in Taiwan and South Korea, while Indian and Asean economies stand out with favourable dynamics and increased foreign direct investment.
Adopting a ‘defensive growth’ mindset becomes imperative as we navigate the complex tapestry of global economic uncertainties. The swift tightening of monetary and credit conditions signals a potential adverse growth outcome in 2024, calling for a strategic and cautious approach to investment.
Joe Little is the global chief strategist at HSBC Asset Management
