The world economy might land "softly” as central banks cut rates. Photo / 123RF
OPINION
We are in the early throes of a new year already, and it’s time to dust off the crystal ball, engaging in the tradition of making big-picture predictions on developments and factors that will influence markets and share portfolios in the year ahead.
Looking back on 2023, while it may not feel like it in New Zealand (the NZX50 rose 2.6 per cent), global stock markets have just recorded their best year since 2019.
The MSCI World Index rose 22 per cent, driven by US indices, which closed the year around record highs. It wasn’t all smooth sailing, but concerns over high interest rates and a deep downturn subsided as inflation continued to fall, and economic data was largely resilient.
The technology sector, driven by the “Magnificent 7”, dominated proceedings, with the blue-sky potential of AI a common thread.
So what does 2024 have in store? Here’s how 10 themes may play out.
Investor optimism grew in the final months of the year, with increasing confidence that it was the end of the central bank rate-hiking journey, and the timeline for cutting rates was the next logical item on the agenda. This was also reflected in the bond market, where the US 10-year peaked at 5 per cent in October and is now back under 4 per cent.
The US Federal Reserve’s last meeting was pivotal in this respect, with officials acknowledging inflation had eased more than expected and rates were as high as they needed to be.
This provided the “punchbowl” for markets, with Fed chairman Jerome Powell “bringing out the tequila” to the bull market party in his subsequent address.
Inflation has fallen by around two-thirds since its peak last year in the US, and it is a similar case elsewhere.
Falling oil prices are helping. Inflation has largely fallen quicker than expected, and we anticipate this trend continuing in 2024. We see the Fed cutting rates four times in 2024 (an election year also providing a nudge here), with a similar magnitude of easing by other big central banks, including the ECB.
Falling interest rates will provide much-needed support to a global economy that is still weak in places. This will be positive for activity within a resurgent corporate sector. Forecast earnings growth for the constituents of the S&P 500 is robust. The tech sector (where earnings are estimated to grow ~18 per cent) is a big part of the story, but strength across other sectors is encouraging as well.
All that said, nothing is linear, and as we were reminded in 2023, there will always be a “wall of worry” for markets to climb. Geopolitical tensions always offer a potential wildcard along with other crises from “left field”.
The Kiwi market, while seeing a strong rally from November, didn’t enjoy the same performance as some other markets. Part of the reason is that our inflation rate has been somewhat “stickier”. The current inflation rate of 5.6 per cent has fallen from its peak (7.3 per cent), but less so than in other economies, and is well ahead of the RBNZ’s target of 2-3 per cent. Expectations have grown that the Reserve Bank may not cut rates until 2025.
The RBNZ appears worried about the inflationary impact of migration (which is at record levels), but this could slow with a softening jobs market, and also with any new government policies to stem the flow. Plus, central banks need to look at both sides of the economic equation.
Our GDP growth has been weak. Our economy is technically in a recession, definitely so on a per capita basis, and even more so in real terms. It may be a challenge for the RBNZ to justify keeping rates elevated should the economy stutter further, particularly when many other global central banks are on a rate-cutting expedition.
Last year was a year of correction for the Kiwi property market, as interest rates pushed quickly higher from unsustainably low levels and credit tightened.
We expect 2024 to be a positive year for the property market as interest rates top out and start to decline. Several banks have already cut their two- and three-year rates. We do not see it being a “boomer” year, although elevated (but possibly slowing) levels of migration should also help on the demand side.
Green shoots that are already appearing in Auckland could well spring further and spread to the rest of the country. The REINZ House price Index for November showed values nationwide were down a modest 0.2 per cent year on year but were up 0.4 per cent in our most populated city.
An improving housing market, while boosting the spirits of homeowners, will not be enough to offset the increasing pressure on discretionary spending. While we see interest rates topping out this year, the fact remains that around half of Kiwi mortgages are set to refix in 2024, and many borrowers will be moving onto higher rates compared to those secured during the pandemic.
This will likely compound existing cost-of-living pressures. Retail card spending has been soft despite high levels of migration. Consumer sentiment remains at a low ebb.
Levels of spending over key shopping periods such as Black Friday and Cyber Monday have also been weak relative to other countries, most notably the US, where consumers are insulated from higher mortgage rates (most borrowers are on 30-year deals).
There could be some good news from our largest customer. The post-Covid reopening in China failed to live up to expectations in 2023, amid a stuttering property market and as officials provided further stimulus initiatives, but not the “bazooka” some were anticipating.
A sentiment headwind for China has been an ageing demographic, but there are signs birth rates may be set to turn higher if a leading indicator is anything to go by. Marriage rates in China, which plummeted in the Covid era, are estimated to be up nearly 20 per cent over the course of 2023.
A nearer-term source of optimism is iron ore prices, which are around two-year highs. China is a huge consumer of the steel-making ingredient, and strong prices here suggest activity is set to pick up in China’s industrial sector.
Chinese officials have also pledged support for the country’s property sector. The idea that China has a massive problem with overbuilding is misplaced. China’s urban housing stock per capita is not expected to reach US/Japan’s levels until 2040. In any event, China could well be the surprise packet in 2024 and make a meaningful contribution to global growth.
What is good for China is also good for our closest trading partner. China consumes vast quantities of Australia’s iron ore, as well as a host of other commodities.
Signs that trade relations are normalising after a frosty period (Anthony Albanese was recently the first Australian PM to visit China since 2016) will also be helpful to demand here. Prices for metals, ores, energy and the like will also likely receive another tailwind from falls in the unit of currency in which they are priced – the US dollar.
The latter will be driven by the Federal Reserve pushing through with more rate cuts than may be expected. Falling rates of inflation may help the Reserve Bank of Australia abandon any idea of more rate hikes and instead join the debate about when to ease off on the rate-tightening throttle.
It may be a close-run thing once again, and while it’s early days, it appears Donald Trump could well be the US President once again.
The path back to the White House may not be a smooth one, with various legal actions and challenges - Colorado and Maine have already banned the former Commander-in-chief from the ballot due to his actions leading up to the Capitol riot in 2021.
However, dissatisfaction over the economy may prove to be too weighty a cross for the current President Biden to bear. A fascinating election battle looms once again, although missing from the sideshow will be Rudy Giuliani and (most likely) a press conference at Four Seasons Total Landscaping.
The “Magnificent 7″ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) were like something out of a Marvel movie as far as the stock market was concerned last year. The collective helped power the Nasdaq to a 43 per cent gain in 2023, the best showing in two decades.
A common thread among the performance has been the excitement around AI (named “word of the year” by Collins Dictionary) and the growth prospects that are to come from a technological innovation that is proving dynamic in its potential applications, even if the exact manner in which it will be employed is uncertain.
Generative AI has already driven huge growth in the chip sector and data centre industries. Every week it seems another big tech name has unveiled its latest chatbot to challenge ChatGPT.
Will AI live up to its promise in 2024? Certainly, there is a lot of expectation baked in. A slight stutter would not be unusual. Major technological innovations historically tend to have their impact overestimated in the short term (3-5 years) but understated over a 10-year period.
Are we at the peak of exaggerated expectations for AI? Time will tell, but if so, the next stage is “the trough of disillusionment”.
The case for Tiwai to stay put remains as compelling as ever. Aluminium prices remain well above US$2000 ($3210), making the smelter highly profitable and one of the most environmentally friendly smelters globally. Tiwai averages around two tonnes of CO2 per tonne of aluminium produced, versus an average of over six times that for aluminium smelters globally.
The smelter remains crucial to the Southland economy, which the new Government acknowledged during the campaign trail. The smelter also accounts for around 12 per cent of New Zealand’s electricity demand. “Horse trading” has continued behind the scenes, and part of this will be around agreements on the clean-up bill, assurances around emissions, better waste management, power “co-operation” during peak periods and a pledge to invest in and support new renewable generation projects.
But ultimately, a deal will get settled before December, allowing the local economy and the electricity sector in general to move on to more certain pastures.
The transition to cleaner energy was a persistent theme throughout 2023. This culminated with government ministers from nearly 200 countries approving the Cop28 deal, unanimously agreeing to move away from fossil fuels for the first time in nearly three decades. Agreement on the “need” is now etched in stone, but the “how” to get there remains far from clear.
A commodity that may have an increasing part to play is uranium, prices for which have reached the highest level since 2008. Optimism is growing that “yellowcake” may be called upon by governments as a means to realistically deliver the energy transition.
Uranium was shunned in the aftermath of the Fukushima disaster in 2011, but with safety measures having been tightened it is now set to be a big part of the world’s energy solution. The demand for uranium is expected to roughly double by 2040.
Globally there are currently 436 operable reactors, with 62 more under construction and around 113 planned. Much of this growth is in China and India, but discussions of building new plants or extending the lifespan of existing ones are ramping up in advanced economies.
The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance.
Expectations tempered around return to surplus in 2027/28.