US economy thrives in 2024, China faces challenges

The US economy has been robust throughout 2024, buoyed by strong consumer spending, fiscal stimulus, and a thriving labour market. In contrast, Europe and Asia, particularly China, have faced economic challenges, with China’s real estate market issues impacting its overall economic performance.

However, there are optimistic signs for the remainder of 2024 and into 2025. China’s leadership is beginning to recognise the need for targeted support for the housing market. Additionally, previously implemented policies to boost Chinese manufacturing are expected to start yielding positive results. This could revive global trade and increase demand for industrial suppliers across Europe and Asia.

Global inventories have recently reached record lows, indicating a significant restocking cycle ahead. This need to replenish inventories, especially before the year-end holidays, is likely to drive industrial production growth in September and October.

In the US, the first interest rate cuts are anticipated to occur in autumn at the earliest. Conversely, China has already begun easing monetary policies but will likely need to employ other strategies to address the housing market decline. This scenario suggests that inflation should remain under control, allowing central banks to begin cutting rates, albeit at different times.

The US presidential election campaign is expected to be a major influence on financial markets in the second half of the year. The outcome may not be clear until polling day on November 5, or even later, reminiscent of the prolonged 2000 election between Al Gore and George W Bush.

Until then, the US Federal Reserve is likely to act as a stabilising force, avoiding actions that could unsettle the markets, and create a favourable environment for risk assets.

Strong currencies

Traditionally, the US dollar and Japanese yen have been viewed as safe-haven currencies. However, the yen’s status is changing due to the Bank of Japan’s anticipated shift away from its extensive money-printing policies. The yen’s movement will now be more influenced by the Bank of Japan’s policy decisions rather than global risk appetite.

Currently, the US dollar benefits from a strong domestic economy, potentially extending its strength into the second half of 2024. Cyclical currencies, such as the Australian dollar, may become more attractive later in the year as the US dollar’s strength wanes and the global economic cycle gains momentum.

With central banks no longer acting as bond buyers of last resort, the new normal for interest rates is expected to be higher this decade compared to the last. Bond investors will need to be more agile, buying long-duration bonds when the 10-year US Treasury yield approaches around 5% and selling when it drops below 4%.

Despite rising bond yields and fewer expected rate cuts from leading central banks, equity markets flourished in the first half of 2024. This growth was driven by improving economic prospects and a strong earnings season. Large-cap growth stocks, particularly in the US economy, are expected to continue leading the secular bull market.

As the global economy improves, investing in stocks that will benefit from the anticipated cyclical upswing in the second half of 2024 is advisable. The industrial sector, which suffered from a manufacturing recession and a prolonged destocking cycle, presents attractive buying opportunities. Companies involved in electrification and automation, despite their cyclical exposure, are poised for growth.

Mid-cap stocks could also gain from the expected global economic upturn. However, focusing on quality stocks within this segment is crucial, given the likelihood of higher interest rates persisting.

New approach

In China, the government’s recent shift in stance towards the property sector, as indicated in the April Politburo meeting, marks a significant change. This new approach includes calling for a reduction in housing market inventories for the first time in nearly a decade.

The rally in Chinese stocks may be more tactical, driven by short-covering due to numerous short positions. Investors interested in momentum trading might consider high-beta stocks, particularly in the internet sector, while long-term investments may favour dividend-paying and high-quality stocks, reported Bangkok Post.