A man leads a bull during a ceremony celebrating the New Year’s opening of the South Korea stock market at the Korea Exchange in Seoul on January 2. Photo: AFP
Opinion
The View
by Richard Harris
The View
by Richard Harris
China recovery, Trump victory: 5 myths investors must beware in 2024
After widespread expectations of a global recession last year fell flat, investors should take note of current narratives to spot potential shocks for 2024
Candidates include assumptions of interest rate cuts, a steady economic recovery in China, a debt implosion, an end to war and Trump’s re-election
Bull markets make for casual investors. There is little volatility, the trend is your friend and investors can hide their mistakes. That was 2023. The obvious misjudgment was investors expecting a global recession, when in fact stock markets had a superb year. The result was happiness.
The Nasdaq index rose a massive 43 per cent, the S&P 500 jumped 24 per cent and the Euro Stoxx was up more than 17 per cent, all after a miserable 2022. Only China broke the mould as the expected post-Covid recovery fell into a surprising decline, with the Shanghai Composite Index losing 6 per cent in 2023. Even worse was our own Hong Kong, down 14 per cent.
Investor expectations in January 2023 were so wide of the mark that it is worth taking a look at the dominant narratives flowing through today’s markets to see what entrenched beliefs could become shocks or surprises in 2024. These are the five investing myths in January 2024.
Myth 1: Interest rates will fall. This is a myth because the US Federal Reserve has no reason to cut rates. The current US economy displays interest rates, inflation, growth and unemployment all around 3-5 per cent, making lower rates unnecessary. Higher rates are preferable for the Fed to keep its powder dry should significant economic weakness emerge.
The Fed’s job is made easier because the sluggish Chinese economy is exporting disinflation. At present, Western economies appear neither critical nor fragile, demonstrating a rare stability last year by shrugging off two bloody wars and multiple bank failures in the United States.
Unless some kind of unforeseen disruptive event pops up, the federal funds rate is unlikely to fall below 4 per cent. There is little chance of a cut in the second half of 2024, when the markets will be consumed by the US election campaign.
US Federal Reserve Board Chairman Jerome Powell speaks during an interview with the Economic Club of Washington, DC, at the Renaissance Hotel in Washington on February 7, 2023. Photo: Getty Images
Myth 2: China will recover slowly. China’s economy seems comfortable operating at an unsustainably low level of growth, and it is facing too many domestic and global headwinds to recover organically.
It is likely that the authorities will have to fire up the economy with an unexpectedly large stimulus package to counteract the slump of post-Covid despair. An outsize injection of liquidity would lift the economy and cause a sharp recovery in the markets. Markets don’t recover slowly but rather, more usually, explosively.
I’m calling the bottom, predicated on a bazooka of stimulus measures. Investors should be prepared for a sharp rally because the wisdom of the crowd will anticipate this jump. Hong Kong operates like a call option on the Chinese economy – worse in bad times, great in good times – so we should do even better.
Myth 3: The debt mountain will bring down the bull. Bull markets almost inevitably founder on the failure of critical parts of the economy to service high levels of debt built up during the good times, especially as this economic cycle saw irrationally low interest rates.
A debt crisis is typically triggered by a significant event in a critically fragile market, such as in the global financial crisis. Such a trigger is unpredictable, and investors cannot invest on the basis of unexpected events that might never happen.
Myth 4: The wars will stop. The ongoing bloodshed in Ukraine and Gaza is accompanied by a desperate hope that it will stop. There is no possible victory for any protagonist, so the likely end is a drawn-out ceasefire as in the Korean war.
The Cold War world order saw the US mediating conflicts with some success, but it no longer has that level of credibility in the Middle East or Ukraine. The legacy of war is that it often triggers a wave of new events that change the status quo.
Appreciable weaknesses in both Russia and Israel could be revealed that was not previously obvious. For investors, the narratives of the conflicts are already stale. It is unlikely that the continuing conflicts will materially upset the global economy.
03:15
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Myth 5: The US will re-elect Donald Trump. If the 2023 Rugby World Cup is anything to go by, favourites rarely prevail. A year is a long time in politics, especially when you are approaching 80 and facing unprecedented electoral hurdles. The chances of a Trump victory are much less than the market thinks, but the election will haunt investors as Trump threatens to settle scores and increase the power of the presidency.
Economics almost always trumps politics for investors in the long term, but Trumpian politics could be an exception because it would dramatically disrupt geopolitics and economics. For instance, a US withdrawal from Ukraine would allow Russia the capacity to make mischief in Syria – right next door to Israel.
The markets in 2023 borrowed performance from the future, leaving them fragile but not critical. Markets become critical if they can’t adapt fast enough to disruptive events. Harris’ Law of Quarterly Reversals heralds a fall of as much as 20 per cent in the first quarter, which is adaptable considering 2023’s strong performance.
Portfolios positioned to take account of the myths above will hold little debt and a balance of cash and equities, accumulating in the Chinese markets. The key caveat is that attributed to former British prime minister Harold Macmillan when asked about his greatest challenge. His reply: “events, dear boy, events!”
Dr Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, writer and broadcaster, and financial expert witness
