2024: the year of geopolitical détente, bonds and valuation multiples?

There is no devil hidden in the details of US inflation figures.

Whether it’s the formula used by the Cleveland Fed, the ‘sticky’ one from Atlanta, the core or the supercore: the box-office blockbusters of the year’s most closely watched figures are all pointing sharply downwards… and the consensus is tightening: 70% of managers surveyed by Bank of America expect bond yields to fall significantly in 2024… A year that investors are hoping will finally see bond yields ease.

Buoyed by signs of a slowdown in the economy (disappointing industrial production, higher-than-expected unemployment figures), recent sessions have fuelled hopes of a disinflationary soft landing that could enable the Fed to return its key rates to neutral next year. Since the end of October, 10-year yields have been falling in tandem with inflation breakevens: – 50 basis points in nominal terms and -20 basis points in real terms. That was all it took for the equity markets to sweep aside the most painful results season since the world economy was first confined.

Boosted by the fall in interest rates, the S&P500 took two rounds of multiples in just a few sessions. Earnings yields on European markets are back up to 8%. In search of beta and duration, the market is returning to small- and mid-caps, which have clearly outperformed the blues since the epiphany of the US figures… To the detriment of government bonds, which are posting their first negative weekly flows since February 2023!

Global inflationary overheating seems to be behind us. But the road to achieving the central banks’ targets will inevitably take the form of economic growth under pressure. By 2024, growth could be halved in the Eurozone and the United States, where public spending will become the main engine of resilience.

In its own way, China is taking part in the collective effort despite itself: it is not exporting inflation. After their spectacular post-Covid rebound, producer prices have been falling since October 2021 under the combined effect of a normalisation of commodity prices, state aid geared towards production rather than consumption, and a sluggish property market. Unfortunately, although China has failed to beat its official growth target, it will shatter its own CO2 emissions record this year: more than 3 billion tonnes per quarter. The fall in coal prices and the rise in temperatures (penalising hydroelectric capacity serving the metallurgical industry) have pushed the provinces to make maximum use of the 1,000 gigawatts or so of coal capacity. With a firm order book of 243 GW, to which could be added the projects under study (150GW), the installed capacity will potentially grow by almost 40% in the years to come, despite the country’s environmental objectives (it will have installed 140GW of solar power this year!) and to the great displeasure of the European Commission, which timidly presented its climate grievances to Beijing this week, on the sidelines of the Sino-American summit in San Francisco.

In the current climate, any diplomatic progress is welcome. But we are still a long way from seeing Biden, who is in the running for 2024, play the famous “China Card” of the Nixon-Kissinger duo, which eight years later, in 1979, led to a frank rapprochement between Mao’s successor Deng Xiaoping and Jimmy Carter. Xi Jinping, who is increasingly basing his power on sclerotic totalitarianism, could benefit from a rapprochement. Now firmly committed to the economy, he has to face up to the twofold mistrust of investors (for the first time since 1998, foreign direct investment fell in the third quarter!) and consumers, whose confidence and outlook are at their lowest for 20 years.

Quoted by New Yorker journalist Evan Osnos in a fascinating article (China’s age of malaise, 23 October 2023), a local entrepreneur defines in one word the affliction that is gripping growing swathes of the country’s youth and middle class: mourning. “The mourning of an exceptional past era”, the absence of dreams and aspirations reminiscent of the torments of the Soviet population in the 1970s and 80s.  But unlike an immobile Leonid Brezhnev, incensed by Mao’s occidentalism, Xi Jinping still has the means to escape the declining fate of the Soviet leader, such as freeing himself from the very Brussels barrier of the 3% public deficit to boost consumption and encourage the diversification of popular savings from real estate into domestic financial markets…

But Xi’s ways are more impenetrable than ever. Only time will tell whether this rapprochement is genuine, or whether it is part of the Brezhnev strategy, as Kissinger put it: “We Communists have to get closer to the capitalists for a while. We need their technology. But we will continue with our massive military programmes… we will soon be capable of a much more aggressive foreign policy”.

Nonetheless, 2024 holds out many hopes: the hope of a lasting easing of inflation and financial conditions, but above all, the hope of a geopolitical détente between the world’s two main powers, in Eastern Europe and the Middle East. More than ever, people will have the opportunity to express their wishes and convictions. Because 2024 is already a historic year: half the world’s population will be called to the polls next year, the first time this has ever happened in history. Let’s hope that, in these troubled times of democratic retreat, people will respond to the invitation to vote and not give in to the fatalism of absenteeism… Nothing is certain. And as Brezhnev once quipped: “the problem with elections is that you never know who’s going to win”…

Thomas Planell, Portfolio manager – analyst at DNCA. This article was finalised in November 17th, 2023.

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