Sectors
In this note, we preview the Q4-2023 earnings season and share what we will be watching.
The expectation that China is best placed to win the global EV race presumes the persistence of the status quo. Reality, however, may differ as the sector looks set to be hit by a range of changes. If nonlinearity were to emerge in the global auto sector, as it often does, then the EV transition could end up spawning a very unexpected list of winners and losers.
The Fed faces a dilemma. Cut rates early to avoid a recession, but at the risk of not slaying wage inflation. Or, not cut rates early to ensure that wage inflation is slayed, but at the risk of a downturn. Faced with such a dilemma, the lesser evil is to slay wage inflation even at the risk of a downturn. Meaning that the market has overpriced early rate cuts. We discuss some other investment implications, and identify two rebound candidates.
The market’s pricing of a soft landing means that geopolitical risks are becoming more, not less, relevant in 2024. US domestic divisions will invite challenges as foreign powers rightly fear that US policy will turn more hawkish after the election.
The Santa Claus rally has been fueled by investors optimism about a soft landing which is the least likely macro outcome in 2024. A pullback in the market is imminent as the probability of "too hot" or "too cold" will get priced in. We are downgrading Software and Services on a tactical basis to take profits but maintaining a strategic overweight in the same trade.
Following today’s US jobs data release, the Joshi rule real-time US recession indicator inched up to 0.18 and is now just a whisker from its recession event-horizon of 0.20.
In this final note for the year, we take profits and close several long-term investment positions: Overweights in Insurance and Commercial Services, and underweights in Utilities, and Retail and Commercial REITs.
The statement from last week’s Central Economic Work Conference indicates that Chinese authorities are still not considering large-scale stimulus in 2024. Odds are that a full-fledged business cycle recovery in 2024 is unlikely. Chinese share prices remain vulnerable, and strengthening in the RMB will be short-lived.