Japan hasn’t been a particularly well-loved market over the last few decades but convincing performance in 2023 has well and truly put the cat among the pigeons, and all eyes are on how far this new direction of travel will go.
Winston Churchill said: ‘A pessimist sees the difficulty in every opportunity, an optimist sees the opportunity in every difficulty’. From the US banking crisis and China’s property crunch to bond market turbulence and conflict in Ukraine and Israel, investors have had choppy waters to deal with in 2023 but, despite fears and pessimism, resilience has prevailed, and most share prices have rebounded after a very challenging 2022. Where will the opportunities be in 2024 and should the glass be half empty or full?
In previous guidance, Powell had focussed on the possibilities of further rate hikes, but whilst the Fed were meeting, the release of core CPI and PPI numbers clearly surprised them on the downside and Powell openly referred to Fed members revising their Summary of Economic Projections (SEP) numbers on the back of this. In the SEP, growth forecasts were upgraded, and core inflation forecasts declined evidence of supply side improvements. This is in line with a recent interview given to the FT by economist Claudia Sahm of the eponymous Sahm rule who believes a soft landing is ‘in the bag.’ The inference at the press conference was that the Fed also believes this to be the case and the Chair emphasised that it was now future rate cuts that were the focus of debate. The Fed also seem comfortable with the loosening of financial conditions which have occurred looking at the bond, equity, and currency markets. This should present a more favourable backdrop for investors as we enter 2024 with the headwinds of recent years dissipating for now at least. One word of caution is that the soft-landing scenario has now been priced in by markets to some degree, so if there is any adverse news, the market reaction could be unfavourable, especially with the S&P relative strength indicator at extended levels and the deviation from the 200 moving day average at +10%. The January employment data may also have an impact on markets.
In contrast to the United States where growth has surprised on the upside, China has been the major economic disappointment of 2023. After initial euphoria over the unexpected dramatic post-pandemic reopening, China initially did see a pickup in the service sector but focused on smaller ticket spending such as dining out and entertainment. The manufacturing sector in China suffered from what Jay Powell referred to in his recent press conference as people having too much ‘stuff’ and being unable to store any more goods creating a scenario where manufacturing exporters across the world have experienced sluggishness in demand as spending switched to services.
2024 The Year that Defines Jay Powell’s Legacy
Markets were encouraged by the December US Federal Reserve meeting as the dovish comments of the Fed Chair came across as a pivot on interest rate policy. Some commentators were surprised at this tone, given the loosening of financial conditions, which declines in longer-term interest rates have delivered. In 2024 Powell will need to prioritise between looking to nail a soft landing and a legacy of one of the great US central bankers to deliver this, with the ongoing risk that the Fed loosens too early. If this occurs, he will go down in history as another Arthur Burns and runs the risk of engineering a recession if he is then forced to tighten monetary policy again at a later stage.
T. Rowe Price Emerging Markets Discovery Equity Fund
My next meeting was with Ernest Yeung and Haider Ali who manage the T.Rowe Price Emerging Markets Discovery Equity Fund. The investment approach is differentiated in that it is prepared to look through a whole cycle and is value oriented - not deep value but looks outside the quality growth bucket focused on by many fund managers. The fund focuses on forgotten names rather than highly controversial ones where the earnings trajectory can change in a positive way and argues that average companies which are improving can give excellent returns to investors. The managers are backed up by the T.Rowe Price analyst team, so are not working in isolation.
RSMR has been researching and rating funds since 2004 and providing high quality outsourced investment solutions to advice businesses since 2007. RSMR provides one of the widest sets of recognised and respected fund ratings in the marketplace, underpinned by rigorous research, extensive experience, and thorough analysis. The RSMR Investment Team covers the entire Investment Association universe, finally rating around 15% of the researchable universe at any one time with all rated funds carefully monitored and reviewed on an ongoing basis. For the last 10 years and on an annual basis, RSMR has presented a set of R Awards to fund groups offering strategies they consider to be best in class versus their peers at their flagship conference in Harrogate.
My arrival in Hong Kong at the start of October coincided with the mid-autumn festival. Unusually, humidity levels and temperatures were more like early September which is always a warning sign of an impending typhoon, and the predicted typhoon did come to fruition the following weekend. Hong Kong only emerged from Covid-19 restrictions in Spring of this year and as a result, many of the trade fairs and corporate events which normally take place outside of the hot and humid summer months have continued to be postponed or transferred elsewhere. Visitor activity at the airport was still quiet with no queues at immigration. The airport express train to the city centre was running but it was a shock to find that there were no luggage trolleys for international visitors at Kowloon Station as the staff maintaining their availability had not been re-employed.
United States Declaration of Independence signatory Benjamin Franklin said: ‘I’d rather go to bed without dinner than to rise in debt’ and ‘If you know how to spend less than you get, you have the philosopher’s stone.’ The debt ceiling in the US was created under the Second Liberty Bond Act of 1917 and is defined as the total amount of money that the US government is authorised to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
Markets have remained relatively sanguine, even as the attack on Israel and heightened tensions within the Middle East have dominated news flow. Investors might be surprised at this, but markets generally separate humanitarian tragedies from economic ones and with limited impact on the oil price to date, events in the Middle East remain a left field tail risk to markets rather than central case. Clearly, if Hezbollah attacked Israel, a US response would be likely and a strike on Iran would, in the short term at least, see a sharp jump in the oil price with adverse sentiment potentially dominating markets. Since the conflict started, the primary driver of the S&P 500 in the US has been the movement in the US Treasury market.
Over the last 5 years, when it comes to growth and value, there have been two very distinct periods. Growth stocks have dominated since the Global Financial Crisis, but over the last 3 years, since Pfizer Monday in November 2020 when the first vaccine candidate against Covid-19 achieved success, value stocks have edged into the spotlight. Growth stocks generally do better when interest rates are low and are expected to stay low and value stocks tend to come to the fore when rates rise.
Markets have had a more challenging third quarter as investors realised the strength of the US economy and that a so called ‘soft landing’ would not lead to a rapid reversal in US Federal Reserve policy, highlighting that rates would stay elevated for longer than markets expected. Bond markets re-priced at the longer end of the curve as market participants realised that even when the Fed stopped raising rates, cuts were not likely to follow quickly. For most of the quarter, equity markets ignored the valuation impact of rising nominal and inflation linked (real) yields, but during the second part of the quarter came under pressure as bond yields rose close to the 4.5% level in 10-year debt in the US.
China's property industry has been an important engine of economic growth over the years and accounts for as much as 30% of the country's GDP. The sector represents more than half of global new home sales and home building, and is the largest asset class in the world, with an estimated market value of around $62 trillion. Investors see the revival of the property sector as crucial to the recovery of the world's second largest economy following three years of self-imposed pandemic isolation.
When it comes to personal transportation needs, Uber has been the main disrupter in the market since 2009. Uber's radical business model, explosive growth, and numerous controversies have made it one of the most fascinating companies to emerge in recent years. Its global ride-sharing app made it the most valuable company in the world at one point and although the road hasn’t always been smooth, Uber remains the leading company in this space with a reported 7.6 billion trips in 2022, $31.9 billion in revenue and a net loss of $9.1 billion.
Alastair Campbell’s career has been built on his outstanding ability to communicate and overcome adversity. He’s a proven expert in both political commentary and interpersonal communication and has a profound grasp of what makes a great leader.
There’s a lot of noise about a potential crash in the UK housing market with some commentators throwing out predictions of a fall in house prices of up to 35%! With so many UK residents owning their own property and the housing market effectively being the jewel in our economic crown, scaremongering on this scale is bound to strike fear into the bravest of hearts. So, just how likely is this scenario?
In Spring 2022 we talked about regime change ruling the world and since then, the battle to control inflation has dominated investment markets. We saw the US Federal Reserve May 2022 meeting as pivotal, describing it as Jay Powell’s ‘Draghi Do Whatever It Takes Moment’ and since, the US Fed Chair has consistently reiterated to markets the total commitment of the Fed to return inflation to a 2% rate. The Fed believe the 2% rate is necessary to achieve enduring economic cycles with full or maximum levels of employment and, as long as inflation remains above the target, it would be very difficult for the US central bank to alter its inflation target without losing credibility. At the press conference following the June 2023 Fed meeting, Chair Powell stated that the Committee would ‘Do whatever it takes to get it (inflation) down to 2% over time’.