CoreMacro

The Saudi economy is facing internal and external headwinds. The geopolitical conflict is also escalating in the Middle East. EM equity portfolios should stay neutral on Saudi stocks. EM sovereign credit portfolios should upgrade Saudi Arabia from neutral to overweight.

The Brazilian government and the central bank will be prioritizing growth over curbing the fiscal deficit and inflation. The outcome of an easy policy mix is that growth and inflation will be higher relative to market expectations, and real interest rates will drop considerably. We recommend that investors go long mid- and small-cap stocks on a pullback and inflation-linked bonds. However, foreign investors should hedge the currency risk.

Decelerating nominal sales, a peaking credit cycle, and very high valuations - Indian stocks will not escape the carnage when risk assets globally begin to sell off.

The combined US credit impulse and fiscal thrust indicator will likely relapse in 2024, heralding growth weakness. Stalling US sales volume and falling inflation, combined with sticky labor costs, will herald a non-trivial profit margin compression. The recent increase in Asian exports will likely prove to be a mid-cycle improvement rather than a cyclical recovery.

Vietnamese stocks may not see an immediate rally as global manufacturing and exports remain weak. But investors with longer-term horizons should stay overweight this market.

Special Report

The major question facing EM investors in 2024 is whether or not EM will cross the Rubicon. The path to a soft landing in the US remains elusive. The recent improvement in global manufacturing/trade will likely prove to be a mid-cycle bounce rather than the beginning of a cyclical recovery.

Special Report

The overarching macro theme for China in 2024 will be deflation and its impact on the economy, macro policies, and financial markets. Widespread deflation, in combination with high debt levels and falling real estate prices, has unleashed debt deflation and balance sheet recession dynamics. The latter are rendering monetary policy inefficient.

Meager credit growth and shrinking real wages will keep Thai inflation very low in the coming months. The currency will get support from an improving current account surplus. Fixed-income investors should upgrade Thailand from neutral to overweight within EM domestic bond portfolios.

The recent increase in Korean exports will likely prove to be a mid-cycle rebound within a cyclical downtrend. Korea’s households and enterprises are among the most indebted globally, and their debt service ratio is among the highest in the world. Korea’s 10-year bond yields have peaked. We discuss opportunities in Korean stocks as well as in fixed income and currency markets.

Contrary to the prevalent belief in the global investment community, goods/merchandise inventories in the US and East Asia are rather elevated. Financial markets respond to final demand fluctuations, not inventory restocking. Global manufacturing/trade will continue contracting, even though the pace of contraction might moderate in the near run. We recommend that investors fade the current rally.