What a difference a year makes. At the end of 2022, all eyes were on China as the abrupt end of the government’s zero-Covid policy fuelled hopes of a sharp recovery following three years of self-imposed isolation. In early January, The Economist described China’s rapid reopening as “the biggest economic event of 2023”.
Fast forward a year and China is something of a sideshow in the year-ahead outlooks released by Wall Street’s top investment banks over the past month. In a report titled “Growing apart, cutting together”, Bank of America said that, while it anticipated divergences in economic performance across the world, 2024 would be “the year of [interest rate] cuts.”
Morgan Stanley’s outlook, tellingly titled “The last mile”, said global inflation had peaked, with the United States Federal Reserve and the European Central Bank likely to start loosening policy in June. Meanwhile, Goldman Sachs was decidedly bullish in its outlook titled “The hard part is over”, predicting that the economic “plane” had “landed safely” and that there was “no imminent risk” of a US recession”.
All three outlooks concentrate on the question that is on every investor’s lips right now: are leading central banks done raising borrowing costs and, if so, when will they start cutting interest rates and by how much? While other economic, financial and political factors are assessed, they are either of secondary importance or are contingent on the path of monetary policy.
The laserlike focus on inflation and interest rates is not surprising given mounting concerns about a sharper global downturn next year caused by excessively tight policy. In Bank of America’s latest monthly fund manager survey, nearly two-thirds of respondents said the biggest tail risks in markets were policy-related, such as persistently high inflation, a global recession and a systemic credit event.
China, by contrast, is a peripheral concern. In the survey, a Chinese property bust – which was never viewed as a major threat to global markets in the first place – is no longer considered a significant risk. Although there are sections on China in each of the outlooks, the country only has a bit part that is clouded by uncertainty in the overarching narratives.
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This is not surprising given that investors were wrong-footed by the scale and severity of the downturn in China this year. Few are willing to predict with any degree of certainty how the economy and markets will fare in 2024. Expectations are low, and there is a palpable lack of conviction about Beijing’s willingness and ability to restore confidence, especially in the ailing property market.
That the spotlight has shifted away from China could work to its advantage. This could give policymakers some breathing room to come up with a more credible plan to revive growth.
Nomura, one of the most bearish voices on China, said in a report published on Wednesday that by the spring, “the pain of another economic dip may finally convince Beijing to roll out truly effective measures to help deliver pre-sold homes, clean up local governments’ financial mess and ramp up fiscal spending in the right places”.
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This is debatable. What is clear is that other risks and vulnerabilities in the global economy matter more to investors. The bad news in China has been priced in for some time. The scope for negative surprises in 2024 is much greater in advanced economies, particularly when it comes to central banks.
Bond markets are expecting dramatic cuts in interest rates in the euro zone and the United States next year, which would normally be associated with a recession. Yet, stock markets anticipate a “ soft landing” for the economy while central banks insist the fight against inflation is not yet won. Clearly something has to give, and whatever gives could hit sentiment hard.
Chinese assets could also benefit from growing concern about markets that have benefited most from the nation’s woes. As much as a quarter of the increase in India’s stock market capitalisation occurred in the last three years, fanning fears about lofty valuations.
In Japan, the long-anticipated exit from ultra-loose monetary policy is set to take place next year. While the Bank of Japan will tread carefully, the first interest rate increase in the world’s third-largest economy since 2007 is bound to be a high-wire act.
The Japanese national flag is hoisted atop the headquarters of Bank of Japan in Tokyo on September 20. Reports suggest Japan’s central bank could move away from its long-standing ultra-loose monetary policy next year and raise interest rates for the first time since 2007. Photo: Reuters
On the other hand, less attention paid to China could lull global investors into a false sense of security. The mispricing of risk in the world’s second-largest economy remains a source of vulnerability. Although a plausible case can be made that markets have been too bearish on China in recent months, Nomura believes it is too early to call the bottom, mainly because of the enduring crisis in the property sector.
Just because China is no longer the focus of attention does not mean that it lacks the capacity to cause more shocks, particularly across Asia.
However, it is the unexpected – as well as the parts of the markets where expectations are too high or where complacency has set in – that pose the biggest threats. In addition to the uncertainty over monetary policy, risks ranging from whether Donald Trump will be back in the White House to the possibility of the Israel-Gaza war stoking a regional conflagration are more worrying.
As 2024 approaches, China is no longer front and centre. While this is mainly because policy in advanced economies is more consequential, it also stems from confusion over the outlook for China. This creates room for positive surprises, but it is also a warning that investors should not take their eyes off China for too long.
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