This article first appeared in Forum, The Edge Malaysia Weekly on February 26, 2024 - March 3, 2024

In Bangkok recently, I was greeted with the election of 72-year-old former general Prabowo Subianto as the incoming president of Indonesia. Outgoing president Joko Widodo’s son Gibran (37 years old) has been elected as vice-president. At the same time, former Thai prime minister Thaksin Shinawatra has been paroled and rumours abound that he will have an outsized influence on Thai politics and the current ruling coalition.

With Prabowo’s election, it is becoming a pattern that the majority of the leaders of significant economies are now led by over-70-year-old males: Joe Biden (the US); Xi Jinping (China); Vladimir Putin (Russia); Recep Tayyip Erdogan; (Turkiye), Narendra Modi (India); Luiz Inácio Lula da Silva (Brazil); Cyril Ramaphosa (South Africa); Benjamin Netanyahu (Israel); Lee Hsien Loong (Singapore); Datuk Seri Anwar Ibrahim (Malaysia); and Bola Ahmed Tinubu (Nigeria). The leaders of Germany and Japan are at the sprightly ages of 65 and 66 years respectively. It does look like both democracies and autocracies prefer older strong men in an age of uncertainty.

The first deduction is that the economy will be run along reasonably predictable paths, as young leaders may be willing to take more radical and unpredictable risks. Prabowo is business-friendly and will likely undertake programmes to take Indonesia, the fourth most populous country in the world, to higher economic growth. He will continue the move of the capital to Nusantara, which involves huge investments in infrastructure. The leading front runner in the US presidential race, Donald Trump, is a known business-friendly leader, even if his other policies may be controversial.

The second trait is the distinct shift to the right as older leaders care more about business and pro-establishment values than, say, climate change. All the key G20 leaders are focused on ramping up defence expenditure since conflicts like Ukraine, Gaza, Yemen and Central Africa are escalating. Given their experience, older leaders are unlikely to take rash and unpredictable policy measures unless the country is in crisis. The 53-year-old Argentine president Javier Milei has adopted radical policies because his country is running an inflation rate of 160% per year and is in a huge debt crisis.

Third, this cohort of leaders does not care too much about reducing their high level of fiscal deficits or debt. With higher interest rates, fiscal deficits will rise and the International Monetary Fund has warned that advanced countries have debt of over 120% of gross domestic product, while 39 emerging markets are in debt distress or near fiscal collapse. Thus, we would expect to see global debt numbers continue to go up, and imbalances in trade and fiscal accounts rise. That is, until a new round of financial crises occurs and governments are forced to cut down spending and rein in deficits.

The cumulative prognosis therefore is that there will be more muddling through. With 2023 concluding without a recession in the US, this year, a key question is how 71-year-old US Federal Reserve (Fed) chair Jerome Powell would act on interest rates. The direction of the US economy, the only vibrant large economy and market, will be a major factor determining whether the global economy will or will not slip into recession.

The basic reality is that while nominal interest rates may decline if inflation declines, the real interest rates faced by borrowers are currently still at a recent historical high. In other words, if house owners do not see their wages go up, while mortgage interest rates continue to rise as old fixed-interest mortgages are negotiated to the current rate, you will see more mortgage and real estate market defaults in many countries.

In the stock market, the US equity market is trading at historically high price-earnings ratios (PERs), whereas the European, Chinese and Asean stock markets appear to be cheap, but they are cheap because the risks versus rewards story is not sufficiently convincing for prudent investors to jump in. Chinese banks trade at a PER of three to four times, half that of Singapore banks, with even higher dividend yields. Last week’s cut in the Chinese mortgage rate of 25 basis points means that bank interest rate margins will be slightly hit. Chinese real estate companies have price-to-book ratios of around 0.1 to 0.3, but everyone is concerned about their gearing and prospects. So, many investors are staying back, waiting for clearer signals on the market direction.

In the meantime, the Japanese stock market is doing well, mainly because foreign investors find the economy a safe harbour due to weaknesses in the Chinese market, even though Japanese domestic investors remain cautious.

The mainstream debate among investors is really about the direction of US interest rates. Many think that if the US economy were to slow and inflation trends downwards, the Fed will begin to cut interest rates. Powell’s second term as chair, which ends in 2026, means that he would not be under any political pressure to cut interest rates too quickly, lest he be accused of helping Biden to win the November election. He is looking for more evidence that inflation would go down to 2% per annum, but that may be unlikely if the geopolitical tensions remain high in the Middle East. In the meantime, tech stocks remain quite buoyant as money pours into the artificial intelligence (AI) revolution.

The above scenario suggests that the US dollar will remain quite strong, because the non-dollar countries are reluctant to keep interest rates high, preferring weaker exchange rates to keep trade flowing. This strategy is working so long as inflation remains subdued, which is what is happening to the ringgit and renminbi. Both the Malaysian and Chinese economies are running current account surpluses, but foreign exchange reserves have remained static, implying an underlying capital outflow. Thus, foreign portfolio investors are staying away for fear that stock market upsides would be offset by exchange rate downsides. In the end, the equity market potential depends on the underlying confidence that tough structural economic issues are being dealt with.

Thus, in a year when investors worry more about a broadly weaker economic outlook, with a volatile political landscape, it pays to stick to a prudent portfolio with also a shift to technology stocks for potential upsides. Older political leaders do not necessarily understand the potential in technology, but would be happy to ride the benefits.

One of the big questions is whether AI and Large Language Models like ChatGPT will deliver major productivity gains in the economy. This is the real digital divide. Those economies that prepare their workforce to implement and apply productivity gains through AI and digital skills will win. Those who do not will be marginalised. My personal inclination is to look for companies and economies that actually are implementing the AI/digital transformation in an effective manner.

After all, AI investing paradigms will soon replace human stock-picking. Who needs advice from 70-year-old or 28-year-old investment gurus?

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

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.