Macro-Geopolitical 2024 Outlook: Pivotal Election Year Ahead

Key Points

• As long as the US labor market remains resilient and unemployment remains low, we believe the Federal Reserve and other Western central banks are likely to struggle with the last mile of getting inflation back to target.
• We believe that 2024 will offer little respite for China bulls, with the Taiwanese election in January and the US election later in the year both serving as catalysts for negative China volatility.
• Elsewhere, we view the most consequential elections in 2024 for global investors as being in India, Indonesia, Mexico and the UK.
• We believe that a world defined by our key macro themes of China influence, great power competition, big government and financialisation will persist for the coming years.

The year ahead looks set to be a fascinating and pivotal one for macro-geopolitics, with many of the underlying themes that have emerged over the last decade remaining highly prominent: excessive global debt, elevated but moderating inflation, tight central-bank policy, rising nationalism/populism, US/China great power competition, a slowing Chinese economy, and ubiquitous climate challenges.

China and US Elections

We believe some of these trends will reach an important climax in 2024: we should gain a truer understanding of whether China can emerge from its property market woes and rediscover its consumer and business confidence, while the November 2024 US presidential election will tell us whether the US is set to pivot back to another four years of ‘America First’ populism or whether the current administration remains in place to support and underpin the international democratic world order.

Aside from the US, 2024 will be a highly consequential year for elections more broadly, with Japan, Taiwan, Indonesia, India, Mexico and UK all going to the polls. For investors, speculating on precise political or geopolitical outcomes is less important than positioning and hedging for risk. To that end, we believe it is prudent to remain strongly diversified across asset classes, geographic regions, industries and currencies, and to focus on micro themes and stock-specific opportunities.

Inflation

The global inflation rate fell in 2023 as supply chains normalized, labor markets eased, and commodity prices reverted following Russia’s Ukraine invasion. As we head into 2024, however, core inflation remains elevated, with the latest US print for October at 4% and the US Federal Reserve’s (Fed) core personal consumption expenditures (PCE) deflator just below that at 3.5%.

As long as the US labor market remains resilient and unemployment remains low, we believe the Fed and other Western central banks are likely to struggle with the last mile of getting inflation back to target. Therefore, although there is some scope for interest rates to fall next year, as markets are pricing, we think any rate cuts are likely to be later in 2024, with rates remaining elevated compared with recent history.

One interesting feature of US labor markets, and, by extension, wage inflation, is the unionization renaissance and the propensity for increased industrial action, as recently observed in the notable case of the United Auto Workers union. As the US manufacturing footprint grows again owing to onshoring and the vast subsidies available from ‘Bidenomics’, such instances of industrial action will create the scope for supply-chain disruptions and temporary inflation spikes, as will geopolitical events in other parts of the world. Therefore, although US headline inflation has come down from 9% to just above 3% over the last 18 months, investors would be complacent to dismiss the tendency for inflation volatility and short-term price spikes. This backdrop should create risks and opportunities for nimble bond investors in 2024.

US-China Tensions

This year has proven to be an ‘annus horribilis’ for China’s equity market, which has significantly underperformed global markets owing to macro deceleration post Covid reopening and weak domestic consumer and business confidence, coupled with heightened geopolitical tensions with the US, particularly in the technology sphere. We believe that 2024 will offer little respite for China bulls, with the Taiwanese election in January and the US election later in the year both serving as catalysts for negative China volatility. On Taiwan, as things currently stand, the incumbent Democratic Progressive Party (DPP) and its presidential candidate Lai Ching-te appear best positioned to win the election. This would not be a favorable outcome for Beijing, given Lai’s stance on independence and the fear that China would lose further Taiwanese influence to the US.

In November, a return of Donald Trump to the White House would be likely to see investors anticipate the instigation of additional trade measures, including higher tariffs on China. We would expect to see renminbi depreciation in anticipation if Trump is holding a lead into the November polls. None of these events will bode well for China market sentiment, and we therefore see 2024 as the year of ‘peak China fear’ before a potential reprieve in 2025. We would advise investors to remain focused on other emerging markets as a priority in 2024.

Russia-Ukraine

The Russia-Ukraine conflict has broadly entered a stalemate, with Ukraine heavily dependent on Western economic and military aid to hold the line. Russia now occupies approximately 18% of Ukraine’s territory. With other global conflicts such as Israel-Gaza dominating the headlines, growing competition for military support in recent months, other budgetary pressures for Ukraine’s military sponsors and upcoming US elections in November, we believe Western pressure will mount on Ukraine’s President Zelensky in 2024 to enter peace negotiations with Russia.

The US has learned the harsh geopolitical lessons in recent decades of being embroiled in ‘forever wars’. It appears far more likely at this stage that any negotiation will end in a frozen conflict rather than a definitive peace deal, which means that a restoration of Western relations with Russia remains a distant prospect and full sanctions will remain in place for the foreseeable future, particularly while the Putin regime remains in power. However, market signaling of an end to hostilities on the battlefield is likely to be taken as positive for European risk assets including equities, as well as for the euro and other European currencies.

Global Elections

Aside from the previously mentioned US and Taiwanese elections, we view the most consequential elections in 2024 for global investors as being the Indian, Indonesian, Mexican and UK elections. India is important as the engine of global economic growth for the next generation. Prime Minister Modi’s first two terms in power have ushered in significant macro reforms that have enhanced India’s growth trajectory and market optimism. Therefore, a national victory for his BJP party is likely to be crucial for sustaining investor optimism.

Indonesia is another important growth engine and critical for the global electric-vehicle supply chain, given the country’s rich nickel resources and policies to prioritize commodity processing. We expect a smooth continuation of industrial policies under the successor government, notwithstanding the risk of short-term market volatility in the event of close-run elections and heightened populist rhetoric. In Mexico, President Lopez Obrador’s single six-year term is coming to an end, and investors will be closely watching whether his successor can continue a business-friendly policy course which could make the country a relative winner in terms of attracting direct foreign investment, as global supply chains continue to reorientate.

Finally, in the UK, given the Labour Party’s strong lead in the polls, investors can reasonably expect a new policy direction in the event that Labour forms the next government. This may include greater cooperation with the European Union, which could provide investors with a more favorable backdrop.

Investment Implications for 2024

We believe that a world defined by our key macro themes of China influence, great power competition, big government and financialisation will persist for the coming years. This environment presents challenges for central banks and government policymakers owing to its volatility and unpredictability. We believe the best way for investors to navigate these conditions is to be globally diversified. Geopolitical risks, combined with the pressure on fiat currencies and reserve diversification that is underway by central banks, argue for a portfolio allocation to precious metals. In a world of higher-for-longer interest rates, we advocate being overweight fixed income and would add to bond positions on yield spikes. For long-term investors, we advocate a focus on quality compounders within the equity universe, principally within growth sectors such as technology and health care.

Authors

Richard Bullock

Portfolio manager, Fixed Income team