SCB CIO anticipates manageable economic slowdown in US-Japan next year, China-Vietnam trade dynamics could affect export sector; real estate recovery hindered by prolonged high-interest rates

Dr. Kampon Adireksombat, First Senior Vice President and Team Head of the SCB CIO Office at Siam Commercial Bank, outlined four key economic and investment trends for 2024:

1. In 2024, the global economy is poised for an uneven slowdown across countries due to the prolonged elevation of interest rates worldwide, expected to persist until at least mid-2024. This deceleration will be driven by a slump in the export sector, impacting industries sensitive to interest rates, notably real estate and construction. Nations with expanding labor markets and rising wages, exemplified by the United States and Japan, are anticipated to experience a soft landing, thanks to robust domestic purchasing power. Conversely, economies heavily reliant on exports, especially those grappling with factors like the sluggish recovery of the real estate sector, face a heightened risk of a significant slowdown, exemplified by countries like China and Vietnam.
2. Interest rates are projected to remain higher for an extended period, with market expectations of policy rate cuts in the second half of the year due to economic slowdown and inflation concerns. The SCB CIO anticipates the US Federal Reserve (Fed) and the European Central Bank (ECB) initiating rate reductions in the third quarter of 2024. Simultaneously, the Bank of Japan is expected to tighten its bond yield curve control measures in April 2024, with both yield curve control and negative interest rate policy slated for cancellation in October 2024. Emerging market central banks, including those of China, Vietnam, Indonesia, and India, are likely to implement interest rate cuts in 2024. However, expansive fiscal measures by countries with high public debt may cause market apprehension, resulting in higher bond yields and currency depreciation.
3. Investors should be vigilant about potential risks, including the risk of stagflation—slow economic growth coupled with high inflation. European countries, particularly England, are identified as having a higher risk of this condition. Additionally, businesses with significant debt nearing maturity face the risk of refinancing at substantially higher interest rates. Notable examples include the yield to worst of high-yield bonds in the United States, which recently reached 8.6% compared to 5.1% at the beginning of 2020, and Thai BBB-rated bonds with a 5.6% yield, up from 4.2% at the start of 2020.
4. Political and policy uncertainty stemming from elections in major country economies presents another critical risk for investors in 2024. Scheduled elections in Taiwan (January 13), Indonesia (February 14), India (April-May), and the United States (November 5) may introduce volatility to the investment market as campaign activities and policy announcements unfold. This uncertainty could be exacerbated by trade policy and international investment concerns.

The SCB CIO foresees that interest rates have peaked, and historical investment capital concentration in deposits and money markets suggests a shift towards increased risk appetite among investors in 2024. Despite an economic slowdown, interest rates remain relatively high, albeit showing signs of decline. Given elevated debt levels in certain business sectors, the recommendation is for investors to prioritize selection and investment in high-quality asset groups.

In terms of fixed-income investments, historical data indicates that, after a 12-month hiatus in interest rate hikes by the Fed, most assets yield positive average returns. The exception was the year 2000, marked by a technology stock bubble crisis in the US, adversely impacting both stock markets and bonds. Positive returns may also be seen during the initial Fed rate cut, but it is likely to be accompanied by an economic slowdown, potentially increasing the credit spread between returns on private bonds and government bonds, particularly those offering high yields. With a growing number of maturing bonds in 2024-2025, the risk of debt rollover in this segment will rise, emphasizing the recommendation to invest in investment-grade bonds.

Regarding stock investments, the SCB CIO advises the gradual accumulation of stocks in the US, Japanese, Indian, and Thai markets, focusing on the quality growth segments characterized by consistent profit growth and a robust balance sheet. The US stock market stands out due to the anticipation of accelerated company profits in 2024 and the clarity in monetary policy signaling the peak of policy interest rate increases. Defensive stocks resilient to economic conditions should be prioritized. The Japanese stock market offers gradual accumulation opportunities, driven by the expanding performance of listed companies and increased buying power from investors.

In the Indian stock market, gradual investment is recommended based on high economic growth, expanding return on equity (ROE), and attractive stock valuations. The Thai stock market is appealing for its favorable stock value concerning returns versus risks.