Summary
Global equities rose in December 2023 while the US 10-year Treasury yield ended significantly down on softer inflation data and a dovish Fed. Global growth is likely to trend downwards on slowing growth in developed markets and a weak China. Still there are pockets of opportunities in both equities and bonds.
Market update
Equities: Global equities continued to rise in December, with sentiment supported by the ongoing optimism that global central banks will cut rates sooner than previously expected. Softer inflation data and more dovish messaging from the Fed further supported sentiment. The US 10-year Treasury yield ended the year at around 3.8%, significantly down from its mid October 2023 peak of almost 5%. All major markets posted positive absolute returns (on a USD basis). The exception was China which declined on continued weak economic data and lack of meaningful government support. India notably outperformed, returning 8.1% (on a USD basis), with growth coming in at a better-than-expected 7.6% year-on-year for the September quarter.
Fixed Income: In the fixed income markets, expectations of US interest rate cuts in 2024 led to a rally in the US government bond market. The US Treasury yield curve bull flattened with yields on the 2-year, 5-year and 10-year notes falling by 43 bps, 42 bps and 45 bps to 4.25%, 3.85% and 3.88% respectively. The US high yield market returned 3.7% (as proxied by ICE BofA US High Yield Constrained Index) as expectations of an easier Fed monetary policy supported the tightening of spreads. Asian USD credits extended gains for the second consecutive month as the JP Morgan Asia Credit Index rose 2.60%; both investment grade and high yield ended in positive territory.
Macro overview
Growth: Global growth has held up stronger than expected in 2023, bolstered by the especially resilient US economy. However, the positive momentum in the global economy is likely to trend lower in 2024 given that China, another key engine of global growth, is facing headwinds from the weak domestic demand alongside a slow recovering property market and deflationary backdrop. Given the market’s current base case for a US soft landing, a shallow recession remains probable over the next 6-12 months in our view. While growth is likely to decelerate from here, the balance sheets of US corporates and households remain strong. Additionally, the Fed has likely built sufficient firepower in terms of its progress on quantitative tightening (QT), to put them in a strong position to better navigate any risk of recession.
Inflation: Based on current trends, it seems that global inflation has likely hit its peak and the disinflationary trend remains intact. The MAPS team believes that the disinflation trend is likely to persist into 2024. However, we note that the US core PCE (personal consumption expenditures), the Fed’s preferred measure of inflation, remains some ways from its 2% target.
Monetary Policy: DM central banks are likely already at the end of their respective rate-hiking cycles, especially on the back of the Fed holding its key rate steady in December while indicating potentially three rate cuts in 2024. The MAPS team believes that as inflationary pressures ease, global DM rates will likely trend lower. However, we remain cautious about declaring victory over price increases too quickly. Although much attention is now on the Fed pivot, significant policy easing is unlikely to transpire without a recession.
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