As we enter the final stretch of 2023, we have identified three important economic themes that we believe will continue to have an impact in 2024.
1. Fed pivot, falling bond yields and a bull market for US equities: The US Federal Reserve on Dec 13 left interest rates unchanged and sent its clearest signal yet that hikes have ended, with three rate cuts expected next year.
Fed officials have significantly lowered their inflation forecasts. They reduced their projection for core personal consumption expenditure -- the central bank's preferred inflation indicator -- to 3.2% this year, 2.4% next year and 2.2% in 2025. The Fed now expects the US economy to record 2.6% growth this year, up markedly from an earlier forecast of 2.1%.
The bank projects growth easing to 1.5% next year and rising again to 1.8% in 2025.
These figures support what the market calls a soft landing scenario, and as long as inflation is not a risk the Fed can cut interest rates significantly.
This has caused US bond yields to fall sharply. The 2-year and 10-year Treasury yields are around 4.4% and 3.9%, down more than 30 basis points from the period before the latest Fed meeting.
This dip led to an increased appetite for investing in risky assets, especially major world stock markets.
We think the Fed's signal is quite bold, and there is a risk that events will not happen as expected.
Even though the US economy still looks strong and inflation has begun to slow down, we see deceleration in the near future, especially in consumption and the job market, as evidenced by a decrease in new job openings.
Moreover, inflation is likely to be more difficult to bring down, having been stuck in a range of 3-4% since June. If inflation proves to be more stubborn than the Fed forecasts, it may be forced to send out a "higher for longer" signal again, which will cause the currently hot financial markets to cool down.
CHINESE RISK
2. The Chinese economy is still at risk as the government uses stimulus. The latest economic figures for November signal a fragile recovery in China, pressured by weak demand and a protracted real estate crisis.
Although industrial production and retail sales expanded at 6.6% and 10.1% per year, respectively, from 4.6% and 7.6% a month earlier, this partly reflects low-base effects of a year earlier when zero-Covid measures were still in place. Fixed asset investment in November expanded at a low 2.9%, while investment in real estate development fell 9.4% as the house price slump intensified. The price of houses on the secondary market posted the largest drop in nine years.
Meanwhile, consumer prices again entered deflationary territory at -0.5% and imports shrunk, indicating China's economy remains fragile and needs continued stimulus. Top Communist Party leaders are looking at ways to get the economy moving in hopes of returning to 5% growth, using all available instruments, especially fiscal policy.
The central bank has injected US$112 billion into the system through loans to commercial banks. This indicates authorities have shifted from simply maintaining economic stability to stimulating the economy in 2024.
WEAK THAI OUTLOOK
3. Thai economic trends remain weak. The latest figures reported by the Bank of Thailand for October indicate some risk, while the trend is worrisome. Signs of economic deterioration compared with the previous month (seasonally adjusted) were reflected in several areas, including tourism, exports, industrial production and government expenditure, especially capital expenditure because of the delayed budget. The current and future business confidence indices also decreased in almost every sector.
Central bank executives said at a recent economic forum the main Thai economic risk is exports recovering more slowly than estimated. As a result, monetary policy needs to have room to support the economy.
On the fiscal policy side, although there is still uncertainty about the digital wallet handout, we believe the government's efforts to tackle formal and informal debt will help solve problems for individuals and businesses, who will have more money to manage their personal and business finances. By our preliminary calculations, the success of this programme could help the economy expand by another 0.5% from the base case.
With relief from monetary and fiscal policy, the Thai economic picture may improve next year. We forecast the economy to expand at 2.5% in 2023 and 3.2% in 2024. Hence, we recommend investing in the Thai capital market as follows:
1. Big-cap (SET50) stocks that are expected to be investment targets for the new TESG funds. Stocks in the SETESG index with interesting prospects include:
Firms with ESG ratings from A to AAA and prices that have underperformed the SET over the past year, such as OR, HMPRO and AOT;
Firms with ESG ratings of AAA and share prices that outperformed the SET index in the past year. Also look for strong operating results and expected dividend yields above 5%. We choose PTT and KTB.
2. For long-term investors, focus on dollar-cost averaging given that the SET has fallen to the point where risk has greatly decreased and many stocks are undervalued. We recommend BBL, BDMS, BEM, CPALL, PTT and SCC, which are in the SET100, are leaders in their respective industries and have ESG ratings of AAA or AA. The valuations of these stocks are below their 10-year average and their operating results are expected to grow.
3. Our 10 top picks for Yearbook 2024 are firms expected to report solid growth. Some will also benefit from economic measures to stimulate the economy and new investments. They are AMATA, BBL, BEM, BDMS, CPALL, CRC, GULF, OR, SCC and SCGP.
Dr Piyasak Manason is Senior Director of the Investment Strategy Department, INVX-Research Group, at InnovestX Securities Co Ltd.