KALL - AI And The Dragon: What Trends Will Dominate 2024?

2024-01-27 03:48:00 ET

Summary

• In 2023, we believe the S&P 500 Index was driven higher by AI and the "Magnificent Seven", leading to concerns about the concentration of risk in these few names and the downsizing of Emerging Markets (EM) allocations in investor portfolios.
• In 2024, EM is poised to continue its rebound due to a downward trajectory for the US dollar on the potential for Fed rate cuts or at least a plateau in rates.
• Although Taiwan, South Korea, and India performed well in 2023 due to AI-fueled semiconductor demand and a strong post-COVID economic recovery in India's case, lofty valuations in these markets may come back to earth somewhat in 2024, leading us to favor cheaper EMs such as Brazil and China.
• Focusing on long-term trends and maintaining a strategic allocation strategy, we remain cautiously optimistic about China's recovery in 2024 and beyond, and believe that current equity valuations in China do not accurately reflect fundamentals.

2023 defied most expectations and extended already existing global equity market imbalances. It was a year of higher US rates and US Dollar, uncertain inflation, emerging artificial intelligence technologies, an expanding energy transition, and the stabilization of China. Against most odds and a harsh macroeconomic backdrop, the US economy continued to show resilience with jobs and consumption, leading to record valuations for equities in both absolute terms and relative to emerging markets.

2023 started with significant optimism regarding the reopening of China. However, the shocks of the past few years, including COVID, regulations, and real estate, proved to be harder to overcome, at least from a consumer perspective. Despite it all, the Chinese economy continued to recover, albeit unevenly. The Chinese government renewed its commitment to 5% GDP growth through continued stimulus and growth-oriented policies. Meanwhile, emerging markets ex-China benefited from the emerging artificial intelligence ((AI)) craze following the launch of ChatGPT, Ernie Bot, and other Large Language Models (LLMs), despite traditional semiconductors experiencing a major downcycle and high inventories. Companies such as Taiwan Semiconductor and Samsung Electronics were performance leaders ¹ .

Somehow, the beginning of 2024 feels eerily similar to the start of the previous year. We continue to believe that emerging markets are extremely cheap (especially China) compared to the US and have better growth potential. We continue to believe that US equities and the US Dollar are over-extended. We also believe that inflation is declining, and interest rates are at damaging levels. Predicting when the tide will shift is hard to do. The US Fed panicking, this time to the downside, may be a good signal....

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