Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Head of Commodity Strategy
Summary: "2023 is the year that the market finally discovers that inflation is set to remain ablaze for the foreseeable future." - Ole S. Hansen.
In 2023, gold finally finds its footing after a challenging 2022, in which many investors were left frustrated by its inability to rally even as inflation surged to a 40-year high. It turns out that the key in holding down gold’s potential was the market’s mistaken consensus bet that inflation would prove transitory. Central banks largely anticipate that inflation will fall back to target within a mere couple of years, and even the market’s own forward pricing of inflation risks predicts the same. And how was gold supposed to rally in 2022, especially in strong USD terms, if you can get well over 4.0 percent on a 5-year US treasury at a time when 5-year forward inflation rates are priced to drop below 2.5 percent?
2023 is the year that the market finally discovers that inflation is set to remain ablaze for the foreseeable future. Fed policy tightening and quantitative tightening drives a new snag in US treasury markets that forces new sneaky ‘measures’ to contain treasury market volatility that really amount to new de facto quantitative easing. And with the arrival of spring, China decides to pivot more fully away from its zero-COVID policy, touting effective treatment and maybe even a new vaccine. Chinese demand unleashed again drives a profound new surge in commodity prices, sending inflation soaring, especially in increasingly weak USD terms as the Fed’s new softening on its stance punishes the greenback. Under-owned gold rips higher on the sea-change reset in forward real interest rate implications of this new backdrop.
In 2023, the hardest of currencies receives a further blast of support from three directions. First, the geopolitical backdrop of an increasing war economy mentality of self reliance and minimizing holdings of foreign FX reserves, preferring gold. Second, the massive investment in new national security priorities, including energy sources, the energy transition, and supply chains. Third, rising global liquidity as policy makers move to avoid a debacle in debt markets as a mild real growth recession (certainly not in nominal prices, however!) takes hold. Gold slices through the double top near USD 2,075 as if it wasn’t there and hurtles to at least USD 3,000 next year.
Market impact: Spot gold rises above $3,000 per ounce and the VanEck Junior Gold Miners index quadruples in value.
What happened to the future?
What happened to the future?
Mitigate risks by emphasizing high-quality sovereign bonds and exploring potential opportunities in corporate bonds.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.