The Thai financial group Tisco has predicted that the global economy will face a recession next year, due to the slowdown in major economies and the rising risks of geopolitical tensions. The group’s economic strategy unit (ESU) has suggested that investors should reduce their exposure to stocks and opt for safer debt instruments, especially US government bonds, which could offer high returns and low risks.
Global slowdown and recession risks
According to Tisco ESU, the global economy is expected to grow by only 3.2% in 2024, down from 4.1% in 2023, as the recovery from the Covid-19 pandemic loses momentum. The US, China, and the eurozone, which account for more than half of the global GDP, are all facing headwinds from rising inflation, supply chain disruptions, policy uncertainty, and social unrest.
The ESU also warned that the probability of a global recession, defined as two consecutive quarters of negative growth, has increased to 40% for next year, up from 25% in 2023. The main triggers for a recession could be a sharp tightening of monetary policy by the US Federal Reserve, a debt crisis in China, or a military conflict between major powers.
Bond investment strategy
In light of the gloomy outlook, Tisco ESU advised investors to shift their portfolio allocation from stocks to bonds, especially US government bonds, which have a high yield and a low default risk. The ESU said that investing in bonds could generate higher returns than stocks and help investors diversify their risks in their portfolio when the global economy enters a recession in 2024.
The yield on US government bonds, which moves inversely to their price, is currently around 4.5% and is expected to decrease to 3.9-4.0% by the end of this year, in line with the slowing economy. Investing in 10-year bonds now could earn an additional 2-3% price difference in addition to the normal interest of around 4.5%, meaning investors could earn a total return of 6-7% in US dollars in one year, the ESU said.
If the global economy enters a recession next year and the Fed cuts rates faster and stronger than expected, the total return on bond investments could increase to more than 10%, the ESU added.
Stock market outlook
On the other hand, the stock market could face a correction or a crash in 2024, as the earnings growth of companies would be affected by the economic slowdown and the rising costs of inputs and financing. The ESU said that the stock market valuation is already high, with the price-to-earnings ratio of the MSCI World Index at 21.6, above its historical average of 18.4.
The ESU also cautioned that some sectors, such as banking and finance, could suffer more than others, as the high level of household debt and non-performing loans in Thailand and other countries could erode their profitability and capital adequacy. The ESU recommended that investors avoid these sectors and focus on those that have strong fundamentals and growth prospects, such as technology, health care, and renewable energy.