After 3 years of rising global bond yields and with developed countries’ central banks largely done with interest rate hikes, the main theme for 2024 appears to be the expectation for easing of interest rates by the US Federal Reserve. We are of the view that the US and Europe will likely witness sharply slower economic activity and higher unemployment rates. Europe in particular, faces a much higher risk of a prolonged recession. On interest rate, we believe the US Federal Reserve will hold off interest rate reduction as long as possible. This is because shelter cost, a main component of inflation, continues to remain stubbornly high. Furthermore, shipping costs for goods should increase as there would be trade disruptions from rising geopolitical risks as the US and the UK carried out air strikes against the Houthi rebels in Yemen following Houthi attacks on commercial shipping the Red Sea.
Geopolitical tensions will be a key factor in our assessment of the global economy and financial market performances. In our opinion, the US-China tension is the long term, dominant factor in looking into the future state of the global economy and financial markets. Our initial take is that there is some form of business decoupling between both countries, especially in the Semiconductor industry. We see this as an investment opportunity as we believe there should be more innovation proliferating from this tension.
Last year, we saw the emergence of ChatGPT, a generative artificial intelligence (“AI”) which enables users to refine and steer a conversation towards a desired length, format, style, level of detail and language. This stirred a lot of interest in companies adopting AI in one form or another. Market participants are currently at the stage of estimating and gauging the eventual global addressable market. We have some AI companies in the portfolio currently and are excited about their long term growth potential of its applications. We also believe in the enormous opportunities of AI and are constantly on the lookout for these investment ideas. We shall highlight these ideas when we have added them to the portfolio in future.
The Chinese economy is recovering with the main drag coming from the real estate sector. However, it is showing signs of stabilizing after a series of monetary and fiscal policy support. To recap, the Central Economic Work Conference called for policy coherence and reiterated proactive fiscal expansion. Secondly, the next stage of the real estate policy is focusing on meeting developers’ financing needs. Thirdly, a new round of structural reforms on fiscal and tax system will be launched, and this would be unveiled during the Third Plenum this year. To us, these are incremental efforts by the Chinese government to shore up the economy. At the time of writing, the China’s central bank announced that the reserve requirement ratio for commercial banks will be reduced by 50 basis points from February 5. It has also reduced the relending and rediscount rate for bank loans designated for small firms and agricultural businesses by
25 basis points. These are positive moves in injecting much needed liquidity into the market, and we believe there could be more supportive measures to come in 2024. On balance, we are optimistic on the Chinese economy and the Chinese financial markets as the government looks to restore confidence.
This is a Presidential Election year for US and the outcome will have implications on how the US policymakers shape the market and economy. This is something we will not delve in greater detail as we do not really have sufficient insights to the domestic political challenges. We will only look at the economic and market directions as data evidence to guide our investment thinking. Our best guess is that the US economy is directionally looking inwards.