Market Update 12th February 2024
Year of the Dragon
The lunar new year happened over the weekend so we are now officially in the year of the dragon. Markets in China will be closed this week for the celebrations. There was a brief and small rally in China stocks last week, which was surprising. The China Covid bounce which never happened, but many predicted, actually helped the inflation story over the past few years, if there had been such a rally there would have been rises in energy, commodity and goods pricing. China remaining weak has helped, but the government has started tinkering with policies around the edges to get back some consumer confidence, which is at a low.
China is about 25-30% of the MSCI Emerging Market index, so what happens in China is important for EM benchmarking. However, other emerging markets (EMs) have been getting more attention last year and going into this year, and rightfully so. Generally EMs are in a different point in the rate cycle, some were cutting rates last year, such as Brazil and Hungary. This has meant there has been some attractive opportunities in EM, and the market is still trying to predict when developed markets central banks will follow suit.
Currently the US market is pricing in rate cuts this year which some believe are not actually deliverable, so this could be concerning if the market is pricing it in already. Many predict the FED will be the first developed market central bank to cut rates, but is there a possibility the EU will cut first? Currently, on a valuation basis, the European and UK market not only look cheap vs the US, but they are also cheap vs their history, especially the UK. So, there could be an opportunity for both markets to beat earnings expectations.
No one can predict the US election this early on and I’m not going to try, but if there is a Trump win, I do question what this could mean for the US’s relationship with China, and how this would impact EMs. Indonesia has been seen as an important election this year, and that’s mainly to do with how it has placed itself on good terms with both China and the US, and if this will be able to continue under a new president. Indonesian stocks have been the third best performing over a 20-year period, behind US and Indian stocks. Indonesia has managed to create business-friendly reforms under current President Joko Widodo, and such reforms have been promised to continue under both the presidential candidates. Indonesia will vote for their new president this Wednesday.
There is already a lot of noise coming from the US election, but this is to be expected. Trump is encouraging Russia to attack NATO allies who he believes have not paid into NATO. This could be directly or indirectly – directly as every NATO member country contributes to the running and indirectly through countries’ defence spending. (We are not clear on which Trump is referring too, and I don’t think he is either). This is bad even for Trump, but the reality is that closer to the election both sides will tame down any fighting talk, and any promises will be more aligned with what is achievable in office. There are still question marks over Trumps eligibility to be on the election ballot, the Supreme Court closed its hearing last week, so legal experts believe a decision will be made in the coming weeks. Currently both candidates are on the older side so there is a chance that neither are fit for the election ballot and it will look very different on election day.
Now I’ve read some great conspiracy theories about the upcoming US election, but I think my favourite is one which some Republicans believe Taylor Swift, Travis Kelce, the NFL and President Biden are all in cahoots. The premise of the theory is that Taylor Swift (a global superstar, currently on a world tour) started dating her now partner, Travis Kelce (an NFL player whose team just won the Superbowl yesterday), in summer last year, but that it’s a fake relationship. The NFL have manufactured Travis’ team reaching the Superbowl so that the couple would become – even more – famous and American sweethearts – then the plot twist is that they will come out and support Biden and that many Americans will follow what Taylor Swift and Travis Kelce say. Take with that what you will…. It’s my favourite because of its ridiculousness.
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