What 2024 has in store for investors: Part 2
In 2024, global interest rates will fall faster than expected. This impacts bond, equity and currency markets in particular. Lower rates are due to falling inflation and slower consumer spending in the major economies.
Furthermore, while China is the highest risk of these major economies, this is a global issue and markets are currently not pricing in this lower growth. The result is a risk to equity markets and an opportunity for some corporate bond investors. Overall, it means that 2024 is a year to be more active, not less.
This article is the second in the 2024 Outlook Series. The first article covered the list of the top five risks.
Risk #2: Populist politics and perceptions about global trade risks
Nearly half of the world’s population will be voting for new national leaders in 2024. This includes the world’s largest three democracies, India, the US and Indonesia, with Pakistan and Taiwan’s elections already causing disruptions. This creates significant risks for more uncertainty, aka volatility, in global investment markets.
Global trade is unlikely to dramatically change in 2024; that is not the risk. But the perceptions around this risk could change dramatically due to inevitable political campaigning around what is the largest global election cycle ever seen.
The reason why this is so relevant to investors is that global trade intuitively drives a massive shift of wealth as it did to the UK in the 1800s, to the US in the middle of the 1900s and now to China and India. Furthermore, trade initially lifts overall wealth in exporting economies, but eventually results in manufacturing jobs shifting offshore as the cost of living rises. This inevitably results in a consequent divide in wealth between those providing the capital versus those providing the labour, and political changes.
The political changes that are particularly damaging to trade are promises to increase trade barriers and protect jobs. Moreover, the opposing politician will typically not fight promises to raise trade barriers, and instead implement some smaller version. That is, either way, trade barriers tend to rise. Nor is this an issue specific to the US-China economic battle; but something far more global particularly this year.
So, regardless of the winners, these changes are likely to increase inflationary uncertainty and therefore cause markets to shift to quality and reduce risk. This article from RBC shows that world leaders are speaking with more uncertainty this year than before, for example. It also highlights the overall theme that we are raising here, which is that the tailwinds have died off and so this year is more likely to see a soft decline in the world economy.
Figure 2: Global trade over the past 200 years vs GDP
A drop-off in global trade is not new. While the benefits of trade for the world have been clear in the past few decades, there will always come a time where social upheaval in wealthier economies disrupts the tide of change that trade brings for developing economies.
The chart below shows that global trade increased dramatically under the changes lead by the British Empire in the 1800s, but fell back as the leadership of the British Empire ended, then rose again as US economic leadership arose. The risk now is that global trade reaches the same inflection point seen in the 1800s and starts to decline. This will hurt growth economies like Australia.
World trade relative to GDP
(eg 0.1 means that World Trade is 0.1 x World GDP)
2024 is unlikely to see global trade fall due to lower demand, not a sharp fall at least. Supply shocks are far more likely. There are two key supply shocks to watch for: The first being the export of surplus capacity as China fights lower growth (see Risk #1); and the second being lost local employment leading to greater populist politics and higher trade barriers globally.
If Risk #2 plays out as expected, decisions such as “Brexit” and the rise of populist political leaders will escalate. While this is not new, what makes 2024 more volatile on this risk is that 2024 involves nearly 4 billion people voting in more than 60 countries including Indonesia, Mexico, India and the US. That simply means that regardless of what predictions we make now, populism itself will definitely change by the end of the year(1).
(1)For more details on this topic, see: https://www.aspistrategist.org.au/the-world-in-2024/
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