The equity market landscape remains unchanged since our last newsletter, where investors leaned towards developed markets. Although Asia Pacific markets also enjoyed positive returns, performance continued to trail behind despite noticeable improvements in economic data. We suspect that the fluctuations are mainly attributed to a tug-of-war between year-end tax-loss harvesting and window dressing by investment institutions. Historically, this short-term market volatility tends to persist into January as fund managers adjust their portfolios for reporting purposes.

Equity markets in major developed countries have experienced euphoria since the Fed decided to maintain interest rates for two meetings consecutively, signaling investor confidence that the interest rate cycle has finally peaked. At the same time, the long-anticipated recession scenario appears to be dissipating, with many economists now shifting their base case to a “soft-landing” scenario. Nonetheless, with inflation stubbornly staying above the Fed’s 2% inflation target, we believe that interest rates would continue to stay high. It is uncertain how the future economic landscape will emerge once US housing inflation has been dampened. We believe that the odds of a US recession is moderately high, but it should not culminate into a systemic event.

In the previous month, we briefly touched on the visit of China’s president (Xi Jinping) to the US where we saw positive outcomes. Firstly, China directly announced their commitment to continue peaceful cooperation with the US. Resumption of military talks after many months of radio silence showed China’s willingness to restore political ties with the US.

Additionally, Xi’s dinner with US business leaders was also positive, showcasing clear support from large US corporations despite geopolitical tension, from our perspective. We believe that US corporations still have strong intentions to operate in China over the long-term given their massive population. One of the notable developments since the event was the joint venture between Mastercard and China’s national transaction processor, NetsUnion Clearing. This initiative would allow Mastercard cardholders to enjoy seamless payments in China.

Despite these positive announcements, we also need to see firm, reciprocal actions from the US administration for us to be confident that geopolitical risk has reduced substantially. Our base case as of now is that geopolitical risk will remain a threat throughout 2024 due to the US presidential elections occurring late next year. During this period, we believe that both US Congressional parties will continue to emphasise China as their largest national security threat to achieve popularity.

We will also be seeing many other national elections (notably Taiwan) taking place around the world, and this will have implications on how things will shape up in various forms of conflicts and competition between US and China. As national security takes center stage among leading nations, we anticipate a gradual transition in global supply chains and capital movement over the long-term. This shift would likely result in increased fragmentation, favoring firms capable of maintaining market share and efficiency over the “reshoring” process.

In China, the Central Economic Work Conference has just concluded with policymakers setting a pro-growth stance for 2024, calling for more efforts to support economic growth and revive confidence. Over the last few months, the government has announced various supportive measures, be it monetary, fiscal or administrative. These moves were progressive and we believe they are growing in intensity. We expect the government to roll out more plans in the near term to stimulate the economy and address risks in the real estate sector.

Considering all the above factors, we continue to believe that Asia would continue to be the bright spot for economic growth in the global economy. A lower interest rate environment should also alleviate the tight liquidity situation around the world and bring about less interest-servicing burden on companies and individuals.