Social Unrest

Investors around Europe and North America are concerned that the stock market is increasingly overbought and vulnerable to exogenous risks. We agree and have good reasons to fear that festering geopolitical risks and the US election season will deal negative surprises.

Indonesia will not revert to dictatorship. Yet the guardrails against authoritarianism are also constraining the actions of the next government in tackling near term domestic and regional challenges. For long-term positioning, use potential selloff from a “dictatorship scare” to build position as structural outlook for Indonesia is positive due to the China-West divorce and the global energy transition.

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.

Democrats are favored to win the election until recession materializes. But recession risks are high. Investors should adopt a defensive and conservative strategy in 2024 amid extreme US policy uncertainty.

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.

Investors should reduce risk, increase allocation to safe havens, and brace for oil price volatility and supply disruptions stemming from the Middle East over the next zero-to-12 months.

The global economy will not enjoy an “immaculate disinflation” but will suffer a very maculate one due to China’s growth slowdown and restrictive monetary policy in the developed world. Investors should stay overweight low-beta assets.

The Supreme Court is a generator of certainty rather than uncertainty for US markets. In the event of a constitutional crisis, a court intervention will likely reduce volatility.