Top 10 predictions for the global economy in 2024: U.S. stocks are flat and China's stock market bottoms out

Which industries will have a good time in 2024?

Text: Liu Jianzhong, Chen Xi, researcher of the Industry Research Center of Finance and Economics

Editor|Liu Jianzhong

At the beginning of the new year, we organize our thoughts, and we start from data and logic to make some basic judgments. These judgments are the cornerstone and guide for other reflections in 2024. Here are ten verdicts for 2024.

The United States is very important to the world economy and to China's economy, so let's take a look at the situation of U.S. GDP, U.S. stocks, and the U.S. dollar.

U.S. GDP growth is declining, but there is no recession

The laws of history can give us some enlightenment. Looking at the historical data of the last 50 years (Table 1), when the US dollar raises interest rates to more than 4%, it will cut interest rates in the future. Within a year of the start of the rate cut, the GDP growth rate of the United States was basically smaller than before the rate cut.

However, although GDP has fallen, it has never fallen below zero within a year, that is, there will be no recession. This is because the transition from overheating to recession takes a while.

The current U.S. federal target rate is 5.5%, and it is expected to cut interest rates in March 2024.

Table 1: The timing of interest rate cuts in the United States in the last 50 years, and the comparison of GDP growth before and after the rate cut

The data in Table 1 illustrate two characteristics.

The first feature: the GDP growth rate in the third quarter after the rate cut is lower than the average GDP growth rate in the two quarters before the rate cut. This indicates that after the interest rate cut, the economic growth rate will decline.

Of course, in terms of cause and effect, it is certainly not that the interest rate cut will cause the GDP growth rate to decline, but that the Fed has taken into account various economic factors such as employment and inflation and judged that the economic heat has declined, so it has begun to cut interest rates.

Moreover, in four of the five rate cuts, the average GDP growth rate in the four quarters, including the quarter in which the rate was cut, was lower than the average of the two quarters before the rate cut. The exception was 2007 alone. The average GDP growth rate in the two quarters before that rate cut was just 1.76%, and U.S. home prices have begun to fall rapidly. The government has taken a number of measures to stabilize the decline in GDP. However, government measures failed to resolve the deep contradictions in the economy, which led to the subprime mortgage crisis in 2008.

Currently, the Fed is widely expected to start cutting interest rates in March 2024. Therefore, judging from the historical law, in 2024, GDP growth will also decline.

The second feature: although GDP growth has declined, GDP growth will not reach below zero within a year. It is not difficult to understand that before the rate cut, the economy was in a state of overheating, and it takes time for the economy to go from hot to cold. Historically, the economy does not plummet below zero in a year. Therefore, in 2024, the US economy will be cold, but GDP growth will not fall below zero.

The above is a judgment made from the laws of history. If we start from the microscopic mechanism, we will come to the same judgment.

On November 3, 2022, the US federal target rate was raised to 4%, and on December 15, 2022, it was further raised to 4.5%. The interest rate continues to rise in 2023 and is currently at 5.5%. High interest rates will inevitably dampen demand for housing and investment. Figure 1 has shown a clear downward trend in new home sales.

Figure 1: U.S. New Home Sales (Seasonally Adjusted Years)

But why have U.S. employment, investment, and financial market data remained strong in 2023? There is one key reason: the U.S. has adopted an aggressive fiscal policy.

The U.S. fiscal deficit rate in 2023 is as high as 6%, and this money has supported the economy through various channels. For example, by subsidizing enterprises to promote the return of manufacturing. Figure 2 shows the U.S. private sector manufacturing construction expenditure, which shows a significant increase in manufacturing construction spending, especially in the computer, electronics, and electrical industries.

Figure 2: U.S. Private Sector Manufacturing Construction Spending (Seasonally Adjusted Years)

Tightening liquidity has inevitably led to a weakening of the private sector's balance sheet, as evidenced by the fact that commercial banks' consumer loan delinquencies are beginning to rise (Figure 3). Moreover, fiscal policy in 2023 was unsustainable and will ease in 2024. Therefore, the U.S. economy in 2024 will be weaker than in 2023.

Figure 3: Consumer loan delinquencies by commercial banks

Why won't the U.S. have a recession in 2024? Acknowledging that there are potential risks in the U.S. economy. For example, the pandemic has changed the way many companies work, resulting in high vacancy rates and low yields in commercial real estate in the United States. In a high-interest rate environment in 2024, it will be difficult for landlords to find a low-interest refinancing if a commercial property loan matures. This has the potential to lead to the risk of default, and may also lead to a rapid decline in commercial real estate prices.

However, the U.S. has enough measures to counteract the risk of episodic events with targeted monetary and fiscal policies.

2024 will be the year of transition for the U.S. economy to transition from hot to cold.

The U.S. stock market was slightly volatile and unremarkable

The bulls and bears of the stock market depend first on the P/E ratio, and when the P/E ratio is at an all-time high, the bearish will be magnified. Looking at the S&P 500 Shiller P/E ratio in Figure 4, the current value is 31. In the more than 120 years since 1900, the Shiller P/E ratio of the S&P 500 has exceeded 30 for less than 10 years. Therefore, the current price-to-earnings ratio is on the high side.

Figure 4: Shiller P/E ratio for the S&P 500

In 2024, if U.S. inflation falls less than expected, monetary policy will be tighter than expected, which is not good for the stock market, and if inflation falls as expected, and the rapid decline in economic growth triggers hard landing fears, it will not be good for the stock market.

The only premise for a sharp rise in the stock market is that inflation falls quickly to reasonable levels and employment and economic growth are unexpectedly strong. But the chances of such a combination appearing are slim.

The U.S. added 216,000 new non-farm payrolls in December 2023, significantly exceeding the Bloomberg consensus estimate of 175,000. But the U.S. job market isn't that strong. The initial release of employment data is inaccurate and is often corrected later. In the first 11 months of 2023, the non-farm payrolls data were revised downward 11 times.

In the household survey, the number of unemployed increased by 683,000, the number of unemployed in the business survey increased by 676,000, and the labor force participation rate fell from 62.8% to 62.5% (Figure 5). Judging from these data, U.S. employment is not strong. Of course, the current data is not weak.

Figure 5: U.S. Labor Force Participation Rate (%)

When employment and the economy are moderate, the stock market rises and falls mainly on inflation. Inflation fell more than expected, the stock market was a bull, and less than expected, the stock market was bearish.

The U.S. stock market also does not have the basis for a big bear market. If financial risks are exposed, the stock market will fall briefly. But 2024 is an election year, and relatively loose policies can prevent the stock market from moving sharply bearish.

Therefore, the U.S. stock market will rise or fall slightly in 2024, and it will be unremarkable. We forecast the S&P 500 to rise or fall between -8% and +8% in 2024.

The U.S. dollar index continued to fall

The rise and fall of the U.S. dollar index has obvious cyclicality and continuity. Historically, when the U.S. dollar is in a big cycle of interest rate hikes, the dollar index rises, and when it is in a big cycle of interest rate cuts, the dollar index falls.

As can be seen from Figure 6,

From 1985 to 1991, the U.S. dollar index fell during the major cycle of interest rate cuts;

From 1992 to 2000, the U.S. dollar index rose during the interest rate hike cycle;

From 2001 to 2011, the U.S. dollar index fell during the big cycle of interest rate cuts;

From 2012 to 2022, the U.S. dollar index rose in a major cycle of interest rate hikes.

Figure 6: The U.S. dollar index since 1985

The dollar will enter a major cycle of interest rate cuts from 2024, and the terminal interest rate will fall below 2%. Otherwise, the pressure on the $34 trillion public debt in the United States to pay interest is enormous.

Therefore, the dollar index has entered a downward cycle, and the general direction for the next few years will be downward.

Gold and silver prices rose

The decline in the U.S. dollar index will directly lead to the rise in the price of precious metals such as gold and silver. The weakening of the U.S. economy and frequent international conflicts are good for precious metals.

At present, the consensus expectation of gold growth is also relatively strong, but there is still room. Looking at the percentage of non-commercial short positions in COMEX gold, optimism about gold has room to rise. At the most optimistic scenario, the position can fall below 10%, which is currently 17%. As it is often said in futures, "If the bears do not disappear, the upward trend has not yet come to an end." ”

Figure 7: Percentage of non-commercial short positions in COMEX Gold

Gold is a strategic material in the new era, and China's prospecting investment will continue to increase on the basis of 2023. We expect that in 2024 as in 2023, there will be news of the discovery of large gold deposits in China.

Copper prices rise

McKinsey had projected that global copper demand would reach 36.6 million tonnes by 2031, driven by factors such as the green energy transition, while supply would be 30.1 million tonnes.

However, since 2023, some major copper miners, such as First Quantum Mining Company and Anglo American Resources, have lowered their production in 2024. This will lead to a change in the supply and demand relationship of copper in 2024, and there will be a gap in supply. Goldman Sachs expects a copper shortfall of more than 500,000 tonnes in 2024.

"Copper smelters will experience concentrate supply shortages starting in 2024, and the gap in the concentrate market is expected to widen between 2025 and 2027," an S&P Global senior copper analyst predicts. ”

There will be a shortage of copper gradually becoming a market consensus, and this consensus will accelerate the replenishment of copper smelters, which will accelerate the arrival of copper or copper concentrate shortages.

Shortages mean price increases.

Negative "surprises" in the Chinese economy have decreased

"Accidents" are an important factor affecting the operation of the economy. Negative "surprises" can lead to overcapacity and lower corporate profits. Due to the change in expectations, there will be fewer negative "surprises" in 2024 than in 2023. Under these conditions, China's economy will improve marginally.

The renminbi exchange rate rebounded

China's economic improvement, coupled with the decline in the US dollar index, will further recover the RMB exchange rate.

UBS believes that by the end of 2024, the RMB exchange rate against the US dollar may rise to 7.0, compared with the previous forecast of 7.15. Goldman Sachs said that in June 2024, the RMB exchange rate against the US dollar may rise to 7.1, and in December it may rise to 7.05. According to the latest Bloomberg survey, the median forecast for the yuan against the US dollar was 7.1 in the first and second quarters of 2024, and has gradually risen since then, and is expected to rise above 7 by the end of 2024.

Hong Kong stocks are in a bull market

In 2024, the renminbi will appreciate against the US dollar. There is a significant proportion of companies in Hong Kong stocks, and their main business is in Chinese mainland. Because the Hong Kong dollar is basically anchored to the US dollar, and the Hong Kong dollar depreciates relative to the renminbi, the performance of these companies will be significantly improved in Hong Kong dollar terms.

At the same time, China's economy will improve in 2024, and the company's performance will rise relative to 2023, even in RMB terms.

The third factor is that the US dollar will cut interest rates, international capital will return to the country, and the liquidity of the Hong Kong dollar will also be more abundant.

Under the combined effect of these three factors, a bull market in Hong Kong stocks can be expected. We expect the Hong Kong Hang Seng Index to rise by more than 10% in 2024 and have the opportunity to exceed 20%.

China's stock market bottomed out and recovered

In 2024, three factors are conducive to the bottoming out of the A-share market:

First, the stock market valuation is not high, which is conducive to the emergence of a bottom. Another way to put it is that the implied risk premium of A-shares has reached its lowest level in nearly a decade. In 2010-2020, 2014 and 2018, it reached the same level as it does today. Looking back, both 2014 and 2018 were the bottoms of A-shares.

Second, the marginal improvement of the economy has reduced negative "surprises" and increased positive "surprises".

Third, the appreciation of the renminbi against the US dollar and the US dollar's interest rate cuts have led to improved global liquidity.

Some industries are doing well

Which industries will have a good time in 2024?

First of all, the improvement of inventory in the chip industry will help the industry's profits to recover;

Second, the prices of copper, gold, silver, and platinum have risen, pushing up industry profits;

Third, the demand for steel and cement has improved, the cost has fallen, and the profitability is moderately optimistic;

Fourth, affected by the recovery of the stock market, the profitability of the securities industry rebounded;

Fifth, the number of fertile sows continues to decline, and the price of pork is expected to rise, while driving the price of chickens, ducks, cattle and sheep to rebound.

Figure 8: Number of fertile sows

In addition, the dynamics of humanoid robots, satellite Internet, and AI industries deserve active attention.

An important premise of this article's forecast is that the Fed will cut interest rates in March. If the Fed delays cutting interest rates, the forecast will be postponed accordingly.

Editor-in-charge | To be sure