This article first appeared in Forum, The Edge Malaysia Weekly on January 15, 2024 - January 21, 2024

Welcome to 2024. This is the year that the Barcelona Centre for International Affairs (CIDOB) calls one “of ballots and bullets”. Across more than 70 countries, over four billion people will participate in elections, which will decide the direction of global politics. Meanwhile, war continues in Ukraine and Palestine but there could be escalation across a myriad of lesser-known conflicts. The big uncertainty is whether the risks of war will shape the investment outlook.

Democracy will be tested by the forces of left-wing populism and right-wing politics — a continuation of a trend since 2016 with Brexit and Donald Trump. In the Netherlands, anti-immigrant right-winger Gert Wilders got the most votes last year, whereas in Argentina, extreme personalities like Javier Milei rose to presidential power. With the European parliamentary elections set in June, coalitions led by controversial politicians like Marine Le Pen (France) and Italy’s Prime Minister Giorgia Meloni may capture a significant number of seats. This, coupled with 12 national elections among European Union members in 2024, will see the extreme right making continued political inroads into the policy discourse.

As CIDOB explains: “More elections do not mean more democracy ... The rapid succession of elections in 2024 will be decisive in determining whether the protest, fragmentation and rise of political extremism that have transformed democracies worldwide are reinforced or whether the system weathers the storm.”

Politics and confrontation intersect in several global hotspots, with Taiwan set to hold a presidential election this weekend amid tense US and China relations. The two warring states, Russia and Ukraine, are supposed to hold elections in March, with ongoing combat possibly determining the outcome of whether negotiations occur or war escalates further.

The US presidential election this November promises to be a polarising event. Trump, his barrage of legal troubles aside, still holds a commanding lead in the race to capture the Republican nomination, while current polling puts him ahead of President Joe Biden for the win. Citi forecasts Trump defeating Biden in two of three likely outcomes, with Republicans retaking the Senate in all three scenarios as populism advances.

The US is deeply divided. Americans seem to be more distrustful of their democratic institutions and elected leaders, while also becoming more condoning of violence. A survey by The Guardian and the University of Chicago found that “5.5% of Americans, or 14 million people, believe that the use of force is justified to restore Trump to the presidency, while 8.9% of Americans, or 23 million people, believe that force is justified to prevent him from being president”.

Acrimonious US politics, united only in being against China, may destabilise both domestic and global financial markets, which had an excellent 2023, with US equities returning nearly 26%. The US is the only stock market (other than Japan) that is doing well in a world heading for slowdown, if not outright recession. China’s domestic economic woes have left investors questioning the prospects of the world’s second largest economy, which resulted in a decline of 11% to 14% in its major bourses last year (CSI 300, Hang Seng Index). The outlook for China remains rather gloomy under the burden of a depressed property sector and debt overhang.

Even China’s technology sector has faltered with the MSCI China Tech 100 Index recording a price contraction of 14% in 2023. Comparatively, the Nasdaq 100 Technology Sector gained 67% last year, led by a rally in the Magnificent Seven stocks. By comparison, Chinese search giant Baidu’s share prices drifted nowhere last year. Baidu was an early pioneer in the language model technology that was also used by OpenAI in creating ChatGPT.

On the other hand, US artificial intelligence start-ups have continued to raise substantial private capital. For example, OpenAI completed a financing round last March, valuing the company around US$28 billion, months after releasing the seminal chatbot. The company is now in discussions to raise more money that will see its private valuation soar to US$100 billion (RM464 billion), despite the brief but violent corporate leadership turmoil that spilt into the open last November. Sentiment matters and US companies are enjoying a “do no wrong” moment, whereas the opposite is true for Chinese ones.

This dour atmosphere constricts the ability of Chinese companies to seek diversified funding for their long-term investment plans. In 2023, capital raised via initial public offerings in Hong Kong declined 54% year on year to HK$45.8 billion (RM27.2 billion), according to research by Deloitte. China onshore IPOs saw capital raised fall 40% to RMB355.1 billion (RM230 billion). Conversely, in the same period, US IPO proceeds surged 150% to US$19.4 billion, after a historical low in 2022, to say nothing of the billions of dollars investors pledged to unlisted generative AI start-ups in 2023.

Elsewhere, it is difficult to see how to invest in Europe, which is still deeply mired in the Ukraine war. The Middle East is now disrupted by the Gaza conflict that threatens to widen to involve Lebanon, Syria, Iran and Yemen. The Latin American and African markets depend on growth in the advanced markets to perform. Only Asean markets offer economic growth but this year, the Indonesian presidential election promises to be fascinating in terms of outcomes between two candidates who are related to big political families (Suharto and Sukarno) and a younger candidate who is currently the governor of Jakarta.

Technology seems to be the only sector that is delivering good returns, but valuations in the US are high, whereas Taiwanese and South Korean tech stocks will be affected by tensions with their neighbours. This is a year where the bandwidth of risk has continued to widen, whereas the average returns, especially the equity premium over prime bond risks, may not necessarily justify very large allocations to equity. Sticking with what you know may still be a useful asset allocation strategy.

Tan Sri Andrew Sheng writes on global issues that affect investors. Tan Yi Kai is a Malaysian multi-asset trader based in Hong Kong.

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