Global vs Domestic

In this Strategy Outlook we examine why, contrary to popular perception, the odds of a global recession over the next 12 months are rising not falling.

Turkey’s macro policy stance can hardly be called orthodox. And yet, corporate profit margins will contract meaningfully this year. The lira can also fall massively even if inflation eases from the extremely high levels – just as it did in the 1990s.

In this insight, we provide an update on the Norwegian krone, with attractive trade ideas over a long-term horizon. Shorter-term, our neutral-to-positive view on the dollar keeps us on the sidelines for USD/NOK.

MacroQuant upgraded equities to overweight in February on a tactical short-term (1-to-3 month) horizon, but it continues to see downside risks to stocks on a medium-term (12-month) horizon. Consistent with the model’s relatively somber medium-term growth outlook, it sees more downside for bond yields on a 12-month horizon than on a 1-to-3 month horizon.

Commodity volatility will continue its rising trend since 2014. The US is on the brink of a major election, the outcome of which could reduce its willingness to engage with the outside world. So, states seeking to carve out their own spheres of influence are incentivized to raise the economic costs to the US and discourage its influence in their regions. These states can do this by interfering in key trading routes in their regions. As a result, geopolitical threats to maritime chokepoints are a structural as well as cyclical problem and will persist due to the revival of superpower competition.

The US manufacturing renaissance, spurred on by reshoring, automation, and government spending, is running its course but progress has slowed on the back of tight monetary conditions and the manufacturing recession. The deceleration of these positive trends weighs on the outlook for the Capital Goods industry group, impeding its performance over the short term. However, we reiterate that positive long-term trends for the industry remain intact. We downgrade Capital Goods to a tactical underweight. It remains a strategic overweight.

Taiwan’s election will lead to serious Chinese military and economic pressure but not full-scale war. War is a long-term concern. Investors should short TWD-USD.

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.

Global instability will continue in 2024 – whatever happens afterward. Slowing economies will exacerbate already high geopolitical risk and policy uncertainty stemming from the US election and foreign challenges to US leadership. Overweight government bonds, defensive sectors, the Americas versus other regions, aerospace/defense stocks, and cyber-security stocks.

Our political forecasting scored wins in 2023 but we failed to capitalize on it adequately in our trade recommendations.