As The Tri Polar World Turns - 2024 Outlook: Surprise, Surprise

1108 words – a 3 minute read. The full monthly: 6400 words with 30 charts from 16 different sources.

EXEC SUMMARY

What a difference a week makes!

We know we are not alone in presenting a 2024 outlook piece. As such we wanted to do something unique, something that leverages our independence, Tri Polar World framework & model portfolio process. So, we have focused on Surprises for 2024 – not one or two but 4 macro and 4 market surprises that we believe have the potential to unfold in the year ahead.

Our first surprise is that inflation in both the US and Europe will fall faster than expected, sooner than expected, surprising policy makers and markets alike and setting off all sorts of changes (which we discuss) across economies and markets.

The second macro surprise is that the productivity pick up noted in Q3 US data is sustained as companies implement the tricks of the trade learned during the years of upheaval. This has big implications for our LT global cap ex boom thesis.

The third macro surprise is that those years of upheaval are in the rear view mirror as we reach the stable land we wrote about in our 2023 outlook titled Stability Ahead? (yes we take a look back).

The fourth surprise is that the long running debate between late cycle and early cycle is answered with the W going to those very few, including us, in the early cycle camp. The rate, housing, semi and manufacturing cycles provide support.

CLIMATE

The dichotomy between record renewable installations and the collapse in much of the public market space has made for a head scratching year. Rising rates, excess capacity and lack of inflation protection has meant that investors have suffered rather than prospered along side the record install.

Luckily for our model portfolio clients we have deployed a barbell strategy in the energy space with a mix of trad fuels and clean energy exposure with the latter tilted to Carbon and Uranium which has offset some of the renewable weakness, especially in our Global Multi Asset (GMA) model, less so in our TPW 20 thematic model.

If our surprises pan out, we would expect the public market, clean energy space to recover smartly in 2024 though the excess capacity, especially in China, remains a concern.

ECONOMICS

Our 2024 global economic outlook in a nutshell: solid global growth as EU bottoms and China stabilizes, easing inflation and gradual macro stability built around a lack of excesses coupled with fully employed workforces, consumption growth and fiscal support across the TPW.

While concerns remain about lurking rate related risks we see a global economy that has handled many notable risks already such as: an aggressive tightening cycle, ME conflict & oil spike, Chinese policy mistake and US bank failures to name but a few.

Weak links – Germany and China – look to be bottoming with German Manuf PMIs up 3 months in a row while the IFO and ZEW surveys suggest a similar bottoming process. In China excess savings are finally beginning to be run down while property supply and demand have both stopped deteriorating.

Tactically, we remain focused on our 4 guideposts: US/EU disinflation, global manufacturing recovery, sustained EPS growth and Chinese policy traction.

POLITICS

2024 will be one of the busiest election years in some time with 40 countries going to the polls including of course the US but also Taiwan, India, Japan &  Indonesia among others.

The gaping US political divide colors everything including consumer surveys on the economy, economic policy and much more. The Republican Party’s collapse has left the two party system a travesty.

The hard to figure thing is the sustained demand for USD denominated assets even as US politics deteriorate.

Amidst all the negatives that come from conflict in both the heart of Europe and the Middle East the upcoming meeting between Pres. Biden and Pres. Xi is a real positive. We don’t expect much from it but just the meeting itself sends a positive signal to the world.

POLICY

DM rate hikes are giving way to an EM led rate cutting cycle as DM monetary policy gives way to fiscal policy. Much of the US angst about deficit expansion is due to revenue shortfalls not spending… lower inflation = lower rates = less angst.

The New Industrial Policy in the US and Europe’s Next Gen, Fit for 55 policy mix both have long tails which should provide policy support in 2024, even without new legislation.

Japan is beginning to stand out for its solid policy process as demonstrated by its success in slaying the deflation dragon. Macro stability will sit alongside corporate activity designed to address demographic and cultural needs.

China’s policy focus continues to sharpen with the addressing of local Govt debt woes via the central Govt balance sheet a sign both of the need to fix the problem but also the realization that targeted measures can be more effective than big bazookas. 

MARKETS

2024’s four market surprises are as follows:

First, that the big winners from lower US inflation sooner lie outside the US, namely non US equity and EM local currency debt as it fosters a faster EM rate cutting cycle while macro stability encourages US investors to look abroad.

The second surprise is that this lower inflation process leads to USD weakness as rates soften, yield differentials shrink, YCC disappears, Europe’s economy bottoms and dollar longs reverse. Dollar weakness is the key for risk asset performance in the year ahead. Clean Tech/Future Tech big winners.

The third surprise is that this BTE global outlook leads to Industrial metals OP which coupled with the passage of time brings forth the supply demand imbalance that supports rising prices.

The fourth & final surprise is one we have highlighted over the past month or two, namely the appealing risk reward we see in Chinese equity which has endured record foreign investor selling leading to very compelling valuation (thus its risk – reward appeal) at a time when the economy is likely to pick up and property concerns fade into the background.

Finally, we note that many institutional managers may well find themselves in the unenviable position of being too heavy in cash just as the calendar is about to turn placing them in the perilous position of being behind the performance sweepstakes just as the year comes to a close. This is the stuff of YE rallies and is second only to the perils of starting the new year behind the BM, leaving one in the unenviable position of having to fight, scratch and claw to get back to even.