Equity

It has been a wild few weeks within debt markets – sharp sell-offs, even sharper rallies, and then a renewed sell off. Movements in equity markets have looked tame by comparison. Bond markets are certainly having to process a lot of conflicting information – inflation, deflation, politics and a mountain of potential issuance next year following what was an amazingly quiet year for debt issuance in 2023.

Over the recent years, there has been a tendency amongst politicians and the media to target the CPI rather than inflation itself, or at least the inflation process. Too often have we heard from policymakers that inflation can be brought down through direct government subsidies or price controls. Subsidies may well have a justifiable social purpose, particularly during times of externalities such as wars but they have no role in controlling inflation. We have even heard that interest rates should not be increased “because they affect mortgage rates and mortgage costs are in the CPI”.

The media is abuzz with stories about the demise of the US Dollar as a reserve currency and the rise of alternatives, such as the proposed new “BRICs” currency. From our perspective, we cannot think of a worse monetary idea than a pan-BRIC currency. It is difficult to conceive a less optimal currency area i.e. one worse than the Euro Area, which has certainly had (and continues to have) its problems.

There was quite simply nothing not to like about the latest US consumer price index data; not only was the headline a good number but so too were most of the internals.

One cannot turn on a financial news programme at present without hearing some talking-head or other discussing the outlook for interest rates, almost as though they are the only thing that matters to markets or the economy. We suspect that the matter to a degree to the latter, and much less to the former than is generally accepted.

As the developed world continues to struggle with inflation and a lack of growth, Asia stands out as the bright spot, with inflation well in check and monetary cycles peaking ahead of the West. Growth in Asia is also expected to outperform the West over the next few years, reversing a decade-long trend of developed world growth outperformance.

Financials, healthcare and energy buck the trend and rise in a down market.

Against a backdrop of a more stable bond market, we prefer relatively higher-yielding Philippine, India and Indonesian government bonds. In addition, there appears to be early signs suggesting that inflationary pressures in these countries have likely peaked, which we see providing further support for these bonds. As for currencies, we expect the Thai baht and Indonesian rupiah to outperform regional peers.

Although recent headline-grabbing events within the banking system have moved the topic of a potential credit crunch centre-stage in the markets’ consciousness, the fact is that a credit crunch within the Global Financial System began a year ago, while that in the US domestic economy began late last year. More recently, Europe looks to have moved down the same path. Admittedly, the global situation did improve during December and early January, when global financial conditions eased for a variety of primarily technical reasons, but this has proved to have been only a false dawn.

Our Gravity Index for China has made only a very modest recovery so far this year.