The global economic and investment picture at the beginning of 2024 appears to offer a different outlook than in 2023. Every market seems to be more volatile, notably Hong Kong, South Korea, China, Singapore, Thailand, and even the US and Europe.
One reason is the market has begun to adjust its expectations for the economic direction and monetary policy. In the US, key indicators show the economy to be performing better than expected. US GDP expanded 3.3% year-on-year in the fourth quarter of 2023.
The growth contribution includes consumer spending, which increased 2.8%, and a 3.3% gain in government spending, mainly by states and local governments, as part of the Biden administration's Build Back Better measures.
In addition, private investment grew at 2.1%, with technological equipment and related intellectual property a key driver, while exports continued to expand and imports rose at a lower rate. Net exports made a positive contribution to GDP of 0.43%.
This economic momentum is likely to carry forward to the first quarter of 2024, and as a result the likelihood of an interest rate cut in March has declined to 46.2%, while traders see a 51.2% chance of the Federal Reserve making a move in May.
Meanwhile, US inflation in December was 3.4%, higher than forecasts of 3.1%, attributed to rising energy prices and wages. Tensions in the Red Sea arising from Houthi rebel attacks on shipping have raised concerns as more carriers opt for the long route around South Africa.
Although most commodity prices remain low, higher transport costs will eventually feed through to inflation and this worries the Fed and other central banks.
Most recently Rafael Bostic, president of the Atlanta Fed, said policymakers wanted the geopolitical situation to stabilise before reducing interest rates in case inflation rises further. It may be the third quarter before this happens, he suggested.
This prospect caused bond yields to increase, with the benchmark 10-year Treasury yield rising from 3.8% at the end of 2023 to around 4.1% today, indicating financial costs are beginning to increase again.
Meanwhile, the probability of the Fed starting to cut interest rates in March has dropped to 48% from 70% in recent weeks.
NO CHANGE IN JAPAN
The Bank of Japan (BoJ) indicated it is likely to maintain its accommodative monetary policy as inflation has been declining steadily. With headline inflation falling to 2.6% from a peak of 4.3% in early 2023, there is no rush to raise interest rates.
However, we must keep an eye on Japanese unions' annual wage negotiations in March to see how much the increase will be. The government has called on employers to increase wages by 5% this year to help workers catch up, even as falling inflation has reduced the need to accelerate wage hikes.
The possibility of Japan making a radical shift in monetary policy needs to be monitored. Markets have been speculating for months that the BoJ might soon abandon negative interest rates, but it hasn't happened yet. The central bank has kept rates below zero to stimulate the economy, but the side effect is it allows people to borrow yen cheaply and convert it to other currencies to invest abroad -- the so-called carry trade.
If Japan tightens monetary policy, there may be a withdrawal of investments in various countries back to Japan. This could cause global investment volatility. With low inflation, the BoJ does not need to rush to raise interest rates, which may be positive for investment for a while.
The European Central Bank (ECB) has begun exploring the opportunity to cut rates, with president Christine Lagarde signalling this week it might begin doing so in June amid a sharp recent decline in inflation. Consumer price growth has fallen from 10.1% at the end of 2022 to 2.9% now, while the economy of Germany, the largest in the euro zone, has entered a recession.
Such signals have led research houses such as Bloomberg Economics to forecast the ECB will cut interest rates by more than 125 basis points, with the first cut starting in April.
DARK CLOUDS IN THAILAND
In Thailand, economic prospects are darkening. The Finance Ministry just lowered its growth estimate for 2023 to 1.8% from 2.7%, though official figures are not due until Feb 19. The ministry cut its 2024 forecast to 2.8% from 3.2%, mainly because of problems in the manufacturing sector.
Weak GDP growth of 1.5% in the fourth quarter of 2023 is the consensus view, in line with the Bank of Thailand outlook. Hence, it's increasingly likely the central bank may cut interest rates when its Monetary Policy Committee meets on Feb 7.
All of this implies there will be more financial volatility in the near future, and investors should therefore proceed carefully. Our recommendation is to start accumulating stocks using dollar cost averaging, given the SET has fallen by so much that the downside risk has greatly decreased. As a result, many stocks are highly undervalued.
We recommend BBL, BDMS, BEM, CPALL, PTT and SCC, which are SET100 companies that are leaders in their sectors, with ESG ratings of AAA or AA, and valuations lower than the 10-year average, while their financial position remains strong.
Dr Piyasak Manason is senior director of the Investment Strategy Department, INVX-Research Group, at InnovestX Securities Co Ltd.
