Weekly house view | Welcome to 2024: The great election year

As an eventful 2024 gets underway, let us start by wishing you a successful year. The coming 12 months will see more than half the world’s population vote in elections, with one of the first key polls to be held in Taiwan on 13 January. This year will also see the first interest rate cuts by central banks in developed countries, and implementation of the global minimum 15% tax rate on multinationals agreed by the OECD. Last year ended with asset prices rising on optimism about central banks pivoting earlier than expected, with China the only exception as it was dogged by property sector woes and weak data. We also saw the return of the 60/40 portfolio in 2023, which delivered its second-best return since 1995. This year began with some optimism being reversed as central bank officials and data combined to tame hopes of early rate cuts. We also had early reminders that accidents can happen: an earthquake in Japan, a Chinese shadow bank filing for bankruptcy, and Iran deploying a warship to the Red Sea at a time of rising tensions on the key shipping route.

The minutes of the December FOMC meeting reported participants viewing the policy rate as “likely at or near its peak for this tightening cycle”, though they noted that easing financial conditions “beyond what is appropriate” could make it harder for the Fed to reach its inflation goal. On the data front, US nonfarm payrolls showed a gain of 216,000 jobs last month versus an expected 175,000. The stronger-than-expected report was later offset by a plunge in the employment index of the ISM services survey to its lowest level since July 2020. The measure has never been so low without a recession. Both sides of the Fed’s dual mandate—to achieve maximum employment, as well as stable prices—are now clearly weighing heavily in the reaction function, both for the Fed and markets. The S&P500 fell 1.5%ⁱ on the week (in USD) on the payroll data and 10-year Treasury yields rose to 4.05%. US earnings season starts this week. Investors will closely scrutinise margins and 2024 guidance.

In Europe, December saw a rebound in euro area headline inflation to 2.9% year-on-year from 2.4% in November on energy base effects, as was largely expected. We see gradual disinflation in the euro area this year. Of note was a European supermarket group’s decision to pull some brands due to price rises. In China, the recovery remains gradual and bumpy. The People’s Bank of China implemented a substantial PSL (pledged supplementary lending) in December, which will likely go on real estate and infrastructure projects. The news failed to support Chinese equities, with the MSCI China down 2.7%ⁱⁱ last week (in USD). We prefer to be invested in broad emerging-market equities.