Equities

Investors should not get their hopes up about the Biden-Xi summit. Wait to see if a new ruling party is elected in Taiwan before downgrading geopolitical risk in the Taiwan Strait. US-China strategic détente is possible but neither the geopolitics nor the macro backdrop warrant a risk-on position next year.

China’s capital outflows will likely remain substantial at least through the next few quarters. This wave of capital outflows will likely be more chronic, albeit less acute than the 2015-16 episode. Persistent capital outflows will exert downward pressure on the RMB.

The latest ‘nowcast’ for world economic growth in the fourth quarter has plunged to just 1.2 percent, marking the cusp of another world recession. One important implication is that expectations for oil demand growth and industrial metal demand growth are way too optimistic.

Amid a range of geopolitical narratives, what matters is that the US strategy of economic engagement with its rivals is failing, giving rise to a new strategy of containment that will reinforce the secular rise in geopolitical risk. Our market-based quantitative indicators of geopolitical risk are set to rise in the coming year.

Q3 earnings commentary has been broadly positive, despite intensifying macro headwinds. Going forward, a negative growth outlook and geopolitical risks, are a threat to buoyant earnings expectations. We project that earnings growth for 2024 will move lower than currently projected - a negative for equities. This Santa Claus rally is unlikely to be the start of a new bull market.

European markets have room to rebound in the coming weeks, however, a recession looms. What are the lessons from history that investors can use to position themselves under these conditions?