All the big government pieces—from geopolitics to geoeconomics—will be the key drivers of global finance over the next year
This essay is part of the “What to expect in 2024” series.
Edgy geopolitics and unstable economies will ensure that global markets remain volatile in 2024. This will be a rich year for traders who thrive on volatility and an uncertain 12 months for investors with longer investment perspectives. Those building wealth will experience fear and greed in their portfolios—fear of crashes, and greed because of the opportunities such crashes bring. Those living off their wealth will find themselves in a constant state of allocation war, fluctuating between shifts to high-return equities and flight to safety in low-return bonds. Capital preservation in 2024 will be evenly matched by capital growth.
Local politics will add policy uncertainty to geopolitics. Elections in seven G21 jurisdictions—Indonesia in February, India and Russia in March, South Africa in May, European Parliament and Mexico in June, and the United States (US) in November—will impact money and markets in 2024. Among these, the financial fraternity will most closely watch India and the US—the US because it sets the capital agenda for the world due to a rush of reasons, from the creation of innovative technologies to printing money, and India because it will provide the safe confines of the rule of law in the world’s fastest-growing economy gathering critical mass.
The challenge for investors such as sovereign wealth funds or private equity will be clearer—a flight to democracies. But shifting billions of dollars from one geography to another may not be easy.
Mature global investors, whose span of capital deployment is wider, will steer the long-term capital course. The challenge for investors such as sovereign wealth funds or private equity will be clearer—a flight to democracies. But shifting billions of dollars from one geography to another may not be easy. This will be particularly harder for financial investors in China, where capital exit, like operational walls for the entry of technology firms, for instance, can be raised at whim. The third leg of financial shifts will be capital from companies that have a high dependence on China for sales and profits but are listed on freer stock exchanges.
In terms of scale and size, human aspirations and financial technology enablement, India will be the flavour of 2024 onwards. As the world’s fifth largest stock exchange after the US, China, the EU and Japan, India’s short-term return in 2023 is 16.8 percent, below the US's Nasdaq (43.5 percent) and Japan (29.2 percent), but higher than the US's Dow (12.6 percent) and China's (6.4 percent). But since equities need a longer-term perspective, India’s five-year return is 83.1 percent, second only to Nasdaq. Add the potential of the world’s fastest-growing economy over the next two years, a perceptible shift in the Union government’s invitation to global companies and investors, and a deeper and stronger geopolitical interface with the US, and India becomes a can’t-ignore destination.
The high 22.5 price-to-earnings multiples for the Indian market over other markets such as the US’s 20.5, Taiwan’s 15.5, France’s 14.5, Australia’s 14.2, Japan’s 13.7 or Germany’s 11.9 captures this growth within its higher price. But that doesn’t mean it’s going to be smooth sailing for global investors. Unlike Indian investors, whose universe of returns is in rupees, international capital has to factor in currency fluctuations in its geographical calculus. A strengthening dollar saw the Indian rupee fall by 3.3 percent over the past 12 months, in tune with the falls in the Euro or the Australian dollar. Over the past five years, the Indian rupee has fallen by 15 percent.
This depreciation in currency impacts stock market returns. For instance, the fall in the value of the Japanese yen—a crash of 15 percent in the past 11 months and 26 percent over the past five years—has neutralised the 26 percent stock market returns since January 2023 and 50 percent over the past five years. That said, Japan has suddenly become more investment-worthy today. Simply in terms of value, the same companies are available at a cheaper rate for foreign capital. The increase in stakes in five Japanese trading companies—Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo—to 8.5 percent in June 2023 by the world’s greatest investor Warren Buffett is a signal that Japan is a value play.
How Tokyo negotiates the three threats the country faces—China, currency devaluation, and ageing, each of which is unique in its market expression—remains to be seen. Broadly, Japan will be able to manage China and even profit from the devaluation. But how it will get its people to make Japanese companies efficient will be the big challenge. Unlike the US, Japan is averse to importing talent; it has a culture pitted against women workers and its unfavourable demographics—the country’s age dependency ratio has jumped from 43 in 1992 to 71 in 2022, compared to 47 for India and Indonesia—renders the economy vulnerable.
On the other side, despite the US stock market’s gigantic scale of US$46.2 trillion (seven times greater than China’s, eight times Japan’s and 13 times India’s), it will continue to drive returns. Not from all US companies, but its technology firms that sit on an unprecedented and powerful ecosystem of an innovation instinct, a large talent pool of skilled people, and a deep linkage with risk capital. Although the returns on Dow Jones from January till date are 3.5 percent, those from technology companies listed on Nasdaq stand at 32.8 percent. The numbers over a longer, five-year horizon are similar—34.9 percent and 90.4 percent respectively. Adding the fact that the US dollar is a reserve currency that can be printed at will, and the US a benchmark around which global interest rates hover, and what you have is the momentum of tech opportunities in Silicon Valley and Seattle and their expansion into Austen.
All the big government pieces—from geopolitics and strategic thrusts to geoeconomics, and security to a return flight to democracy—will be the key drivers of global finance over the next 12 months.
The smart money in 2024, therefore, will go to tech firms of the US, fast-growing India, and a few smaller-scale jurisdictions such as Indonesia, Vietnam, and perhaps Saudi Arabia. It will either stay put or exit from Europe which needs to first fix its Russia-China fracture and then heal over the next few years. It will exit from China and Russia, where it may need to take a one-time haircut—the returns expectations are at a new low due to the Russian invasion of Ukraine and an overall real estate-led economic crumbling and megalomanic political implosion in China. All the big government pieces—from geopolitics and strategic thrusts to geoeconomics, and security to a return flight to democracy—will be the key drivers of global finance over the next 12 months. Not merely macroeconomics, but strategic macroeconomics will decide the direction of smart money. Specific opportunities in 2024 will lie in this direction and within the paradigm of volatility it brings.
Gautam Chikermane is a Vice President at the Observer Research Foundation
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Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...
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