2024 UNIT Finance Guide

FINANCE GUIDE UNIT 2024

ACKNOWLEDGEMENTS

EDITOR IN CHIEF: Alec Lu

EXECUTIVE CONTENT

EDITORS:

Amante Abela

Mingxi Shen

EXECUTIVE DESIGN

EDITORS:

DESIGNERS:

Oscar Yin

Sohan Takkalapalli

Lucy Song

Elayna Zhang

Lawrence Wei

AUTHORS:

Rachel Win

Katherine Lu

Harry Yuan

Matthew Davies

Raghu Gokhale

Rachel Win

Chris Goh

Raghu Gokhale

Maya Guden

Sarah Chan Laryssa Latt

DISCLAIMER

Peter Nguyen

Brian Lau

Chris Goh

Lucy Song

Vanessa Lin

Giselle Enlund

Sohan Takkalapalli

Harry Yuan

Katherine Lu

Oscar Yin

Zoey Chen

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INTRODUCTION

Australia's economic landscape in the first half of 2024 has been characterised by subdued growth amid persistent inflationary pressures and shifting market expectations. Economic expansion remained sluggish, with GDP growth hovering just below 1% for the period, reflecting the erosion of household savings and ongoing challenges that a ‘higher for longer’ inflationary environment is having on public consumption and business investment The labour market however, remained robust, with the unemployment rate averaging 4 1% as strong demand across sectors tempered the impact of slower economic growth.

Inflation continued to be a focal point, with the most recent headline print coming in at 3.8%, driven primarily by higher costs in the services and housing sector. This contrasted with moderated goods inflation, which remained elevated compared to pre-pandemic levels Wage growth, while showing signs of peaking, contributed to sustained inflation pressures, prompting cautious optimism as the economy navigated through varying impacts of government subsidies and fiscal policies

Market expectations evolved significantly, transitioning from anticipation of a potential interest rate cut to considerations of another hike, spurred by inflation levels exceeding targets and elevated among global peers in developed markets The Reserve Bank of Australia (RBA) recalibrated its stance, remaining on an extended hold as the board contemplates future rate adjustments against a backdrop of economic recovery dynamics and international economic trends. Market pricing implied that markets were not expecting a near-term change in the cash rate, having earlier priced in some prospect of an increase A rate cut was now not fully priced in until March 2025 The median expectation of market economists was also for the first reduction in the cash rate to occur in March 2025.

Australia's trade relations, particularly with major partners like China, continued to influence economic outcomes, especially in commodities sectors Tariffs and global economic conditions shaped market sentiment, impacting export revenues and economic growth prospects.

Looking ahead to the second half of 2024, economic forecasts suggest a gradual improvement in GDP growth to around 1 2%, supported by easing inflationary pressures and enhanced fiscal support measures Challenges remain, however, including uncertainties in global economic trends, geopolitical events and the resilience of domestic consumer spending amid evolving market conditions.

NOMIC OUTLOOK

k, consistent with most global economies, remains th being expected in 2024.

stralia experienced an annual GDP growth rate of 1 1%growth target The economic growth forecast has also compared to Q1 of 2024, which is largely attributed to hold savings, which translates into lower than expected theless, Australia’s GDP is expected to gradually increase consumption is expected to recover to pre-pandemic aller fiscal drag, stage 3 tax cuts, and the rise in real e above inflation

ess investment, and net exports are also expected to nt years, though the growth is predicted to plateau due hikes Despite infrastructure, digitalisation and renewable pport, business investment growth is forecasted to ease mand and cost pressure and thinner earnings margin. dent growth (accounted for as part of exports) are also predicted to plateau as border re-openings near full recovery.

The current quarterly year-on-year Consumer Price Index (CPI) sits at 3 8% (as of the June 2024 quarter) While inflation still remains higher than the 2-3% target bank, it is a positive trajectory down from 4.1% of the previous quarter. However, there is some upside data suggesting a degree of stickiness in the CPI basket, which is not offset by the higher than expected cash rate assumptions of forecasts, which may be exacerbated by the demand-pull and cost-push effects stemming from a tight labour market This is consistent with indicators of the US economy, which also reveal high inflation may be more persistent than expected.

The rise in the unemployment rate since the trough of 3 4% in late-2022 has stabilised, with figures suggesting there is less spare capacity in the Australian labour market than anticipated As of May 2024, unemploymen April 2024. These strong labour market outcome pressure on both cost-push and demand-pull infl labour costs, which are passed onto consumers, a which drives up demand for household items

Ultimately, Australia’s economy retains a positive performance in 2024. However, risks such as a slow target of 2-3%, mixed signals in the labour market and the potential for sustained sticky inflation m sustainable 3-4% economic growth target

MONETARY POLICY

The official cash rate (OCR) of 4.35% which has remained unchanged since November 2023, as determined by the Reserve Bank of Australia (RBA), is set to remain around its current level until mid-2025

According to the RBA, the current OCR is placed to support the return of inflation to the 2-3% target, as high inflation erodes household buying power and the real value of savings, threatening long-term sustainable economic growth.

To the relief of households under ‘mortgage stress’ due to high interest rates, forecasts from ANZ suggest rates would likely peak at the current 4 35%, and first cuts will start around February 2025. The RBA further predicted rates to decline to around 3.2% in mid-2026, a level unseen since December 2022.

It should also be noted the rate cycle pathway has been diverging from other develop markets such as U K and Canada, who’ve began their rate cutting cycles as of June this year, ahead of the FED who is still sitting at a high of 5 50% as of July 2024

EQUITIES

Australia’s equity performance has not been hindered, with the All Ordinaries index and S&P/ASX 200 increasing by 17% and 9% YTD respectively. This period saw a blend of economic resilience and market volatility, influenced by both domestic and global conditions While the ongoing Russia-Ukraine conflict and escalation at the PalestineIsrael battlefront has induced fresh uncertainty, the S&P/ASX 200 has now recorded a new all-time high as both positive inflation news across leading economies begin settling uncertainty about rate cuts.

The S&P/ASX 200's recent performance made history by breaking above the 8000 level for the first time The index has been range-bound between 6500 - 7500 for the past two and a half years due to rising interest rates, stagnant earnings growth, and recession fears, A soft landing is now looking increasingly likely, bolstering market confidence. Additionally, Australian equity valuations are more attractive compared to US and global equities, with the price-to-12-month-forward earnings trading near its historical average

However, the ASX200’S 1% gain being outperformed by the MSCI index’s 2.4% rise indicates a significant re-rating of the equity markets as they transition into becoming more expensive. Further, with Australia’s market equity valuations in forward price-toearning (PE) multiple rising to trade at 16 8x - one standard deviation above its historical long run average of 14, investors must now actively approach their strategies to find value while avoiding the traps of overvaluation Still, these higher valuations are justified by the 2024 earning expectations remaining consistent and forecasted to rise during 2025.

In terms of size, Australia’s recovery has been driven by large caps, supported by a lower-than-expected number of borrowers failing to make mortgage payments It should be noted that the projected 12-month consensus target revisions for February 2024's earnings season indicate that mid caps (3.53%) and equal-weight stocks (2.21%) may outperform large caps (0 99%) through market share expansions This is evidenced by their historical performance during volatile market periods

IRON ORE COMMODITIES

2024 has witnessed a decline in iron ore prices globally, consequent to weaker demand from Chinese steelmakers still reeling from the nation’s real-estate collapse in 2021 and its slow Covid economic recovery At the same time, there was an increase in steel import activity at the end of 2023 leading to an increase in stocks at ports totalling over 140 million tonnes. Overall demand for iron ore has slumped as a result of the mismatch between the oversupplied ore stockpiles from 2023 and weakening demand for steel Prices fell from $US140/tonne at the beginning of the year to averages of $US105-110/tonne in June

In spite of the falling prices, the March 2024 REQ Australian iron ore exports report have demonstrated resilience in growth, with output set to rise to $136 billion in 202324 This came consequent to the nation’s pivot towards supplying growing demand from regions in emerging Asia and the Middle East countries, able to offset and diversify from wailing Chinese exports.

None the less, the historical prominence of Chinese demand - struggling under dampened economic growth and lack of substantial stimulus for the real estate - is still expected to hurt Australian iron ore exports in the short to medium term Lower price movements are projected for the coming years are expected to decrease iron ore earnings to $107 billion in 2024–25, and to $83 billion by 2028–29 (in real terms).

COAL

Global metallurgical and thermal coal prices have slowly fallen as global supply recover from Covid and the recent Russian-Ukraine conflict which shocked an already tight market. This is reflected in a decline in metallurgical coal prices from $US306/tonne in Q1 2024 to $US243/tonne and decrease in Newcastle 6,000 kcal coal futures from $US135/tonne in the December quarter 2023 to averages of $US127/tonne in 2024

Looking ahead, as global demand for green energy ramps up under pressure of the net zero transition, coal production faces considerable risk and prices are forecasted to further decline Estimates made by the Australian Department of Industry Science and Resources predict thermal coal spot prices to decrease to US$105/tonne by 2029; in addition to metallurgical coal easing to US$185/tonne by 2029 (in real terms)

URANIUM

One rising figure amidst waning commodity prices is Uranium which illustrates significant potential for growth for years to come, as prices are capable of rising well above US$100 a pound. This comes off the back of renewed interest for nuclear, consequent to rising energy prices which have made the uranium transition more digestible Additionally, supply disruptions have also contributed to price pressures expected to persist to 2029, forecasted to be US$120 per pound (in real terms) by 2029.

This price and volume are projected to increase Uranium’s standing as a lucrative Australia export with export values expected to rise to A$2 billion by 2028–29.

FIXED INCOME

Australian fixed income markets have experienced significant volatility throughout 2024, driven by uncertainty surrounding the country's monetary policy. This turbulence has been primarily fuelled by conflicting inflationary expectations, following persistent CPI figures during Q2, heightening risk for a late-cycle rate hike. As a result, shifting initial commentary by RBA governor Michelle Bullock from dovish to slightly hawkish. This has resulted in a broad increase in yield rates across all bond maturities as investors anticipate further rate hikes. Hence, 10-year Treasury bonds have risen to 4.33% up from 4.01% the previous year.

There is a slight inversion in the yield curve (bonds with longer maturities reflect a more traditional upward-sloping curve, where yield rates increase proportionally with maturity dates). The concave up parabolic yield curve suggests that investors are placing a premium on medium-duration bonds, indicating apprehensive sentiments towards both short-term and long-term market conditions due to rate uncertainties.

In a separate context, the credit market has performed robustly throughout 2024, driven by high demand for credit assets, which has been met by ample supply from issuers eager to sell large volumes at tight spreads. Notably, primary volumes significantly outpaced last year’s run-rate, leading to marked improvements in secondary liquidity.

YEAR AHEAD

Australia's economic outlook for 2024-25 is shaped by a variety of domestic policy shifts and rapidly changing global economic conditions. Economically, the nation faces subdued growth amid challenges such as elevated inflation and recent monetary policy tightening by the Reserve Bank of Australia (RBA). The economy is expected to grow by 2% in 202425, with a modest uptick to 2.25% in the subsequent year, driven by factors including strengthening business investment and recovering household incomes.

Risks to this outlook loom large, prominently featuring the delayed implementation of the AUKUS agreement, which was intended to bolster Australia's defence capabilities with nuclear-powered submarines. The United States' decision to halve its 2025 procurement of Virginia-class submarines undercuts expectations, potentially impacting defence sector dynamics and broader strategic alignments in the Indo-Pacific region.

Geopolitically, Australia navigates a landscape fraught with uncertainties, including heightened tensions in the Middle East and ongoing geopolitical friction in the Asia-Pacific region. The Israel-Gaza conflict and broader Middle Eastern instability pose potential risks to global energy markets, crucial for Australia's export-oriented economy heavily reliant on commodities. Domestically, the Australian labour market remains resilient but faces challenges as it adjusts to shifting economic conditions. Unemployment, though historically low, is projected to edge upwards to 4.5% by mid-2025, tempered by ongoing wage growth driven by labour market strength and administered wage decisions. Business investment, a cornerstone of economic resilience, continues to expand robustly, albeit against a backdrop of global uncertainty and fluctuating commodity prices. Consumer spending, however, has been dampened by rising living costs and reduced discretionary spending, exacerbated by higher interest rates and construction costs weighing on housing demand. The RBA's policy stance remains pivotal, with expectations of gradual easing from mid-2025 aimed at balancing inflationary pressures with economic growth objectives.

2

INTRODUCTION

In the first half of 2024, Japan's economy faced several challenges. Despite global comparisons showing relatively lower CPI levels in Japan, inflationary pressures persisted, exacerbated by a weak yen that increased the cost of imports and the yen-carry trade, further straining the economy. Japan's GDP contracted by 0.5% in Q1 2024, reversing from a 0 1% growth in Q4 2023 Japanese authorities have intervened to stem the yen ' s rapid depreciation, spending an estimated ¥3 37 trillion to ¥3 57 trillion recently

Despite these challenges, the economy shows signs of resilience, with expectations of steady growth and an eventual moderation in inflation Inflation, excluding fresh food and energy, remains high and demand-driven, with underlying inflation broad-based across products and services for the first time in decades Wages although present, and rising amid labour shortages, it has not kept pace to offset inflation fully, thus negatively affecting consumer sentiment and spending by the wider economy. Private consumption, accounting for more than half of the economy, fell by 0 7%, marking the steepest decline in three quarters due to high living costs and sluggish wages

Exports and industrial production have been flat and remain an area of weakness. Exports fell by 5.1% while imports decreased by 3.3%. However, government spending grew by 0 2% Corporate profits and business sentiment remain favourable Financial conditions are accommodative, with the CPI increasing around 2 5% year-on-year

Looking ahead, Japan's equity market is expected to grow, driven by steady earnings and a rebound in consumer spending. However, short-term volatility may arise from monetary policy speculation The Nikkei 225 and TOPIX price targets have been slightly lowered due to the global economic slowdown Strong wage increases, the highest in 33 years, are anticipated to boost consumer spending, a critical component of the economy.

MACROECONOMIC OUTLOOK

The economic outlook for 2024-25 reflects a mix of cautious optimism and significant challenges. Economic

On the fiscal front, Japan benefits from ongoing expansionary policies, including income tax cuts, subsidies to mitigate higher energy prices, and initiatives under the Children Future Strategy Outline aimed at demographic challenges and digital transformation Headline inflation is expected to gradually decrease from 3 3% on average in 2023 to 2.2% in 2025 on weak domestic demand, only partly counterbalanced by rising wage pressures and continued yen weakness. Monetary policy adjustments have been pivotal, with the Bank of Japan (BOJ) ending the longstanding negative interest rate policy, yield curve control This pivot marked the first rate hike in 17 years, from -0 1% to a range of 0%-0 1% in March, as a response to inflationary pressures while maintaining a broadly accommodative stance.

Externally, Japan faces challenges stemming from global economic uncertainties and escalating geopolitical tensions Japan’s trade deficit persists due to subdued external demand, though there are signs of potential recovery in IT goods and machinery exports as the world pivots towards AI. At the same time, imports are projected to rise, driven by increased demand for foreign components by export-oriented industries. Net exports are anticipated to have a neutral impact on growth, with the current account surplus expected to stabilise around 4% of GDP

Looking ahead, risks to Japan’s economic outlook are balanced. Potential upsides include the prospect of fiscal expansions stimulating domestic demand and a resurgence in tourist inflows boosting exports, particularly from China. Conversely, a slowdown in China could dampen export growth, while prolonged wage pressures might sustain inflation, prompting further interest rate hikes Fiscal challenges persist, with the general government deficit projected to widen to 6% of GDP in 2024 before modestly improving to 5.4% in 2025. This reflects increased military spending, additional social support measures, and the gradual phasing out of energy subsidies. Public debt is expected to gradually decline from 257% of GDP in 2022 to around 248% by 2025, albeit remaining at elevated levels

RY POLICY

nced its first significant inflation 30 years, with core CPI levels gure is forecasted to increase ent rebounds in consumer boom attributed to a weakening iconductor shortage which has l spending Additionally, strong wage negotiations saw JTUCapan ' s major labour union an average base wage rate eding inflation and signifying a ating Japanese wage growth

ajority vote, the BOJ decided to erest rates - for the first time in points (bps), guiding overnight % from the previous -0.1%. On a J tightened monetary policy its Yield Curve Control policy, rchasing and guiding the yields overnment bonds to around 0% a realignment towards more ry policy after a decade of es that expanded the BOJ's of annual GDP

ns to end an era of relative specially in a period of decline, as a low-cost vehicle for ry trades On another note, this elped push up Japan's 10-year ld to 1 07%, the highest since

equity market as the Nikkei 225 reaches record highs, recording a 17% increase YTD.

The Nikkei 225 is Japan’s leading index consisting of the largest 225 companies listed on the Tokyo Stock Exchange

This has been partly driven by the significant growth of Japanese companies that have benefited from the weakening yen currently trading at 34-year lows against the dollar, and their consequent stronger earnings This holds especially true for those operating in export industries with such a trend for the yen securing greater global sales for exporters trading overseas This boom has also been contributed to by the growth of the semiconductor manufacturing market which Japan holds part of.

Changes to investment regulations have also lured many Japanese investors into the equity market. As of this year, so-called NISA, or Nippon (Japan) Individual Savings Accounts, became tax-free investment options, with limits raised for how much can be kept in such accounts and for how long.

Some analysts have also claimed unions’ demand for higher wage growth (5 1% by March 2025) could further increase domestic consumption, contributing to the Japanese equity market’s record growth

market with a weakening yen resulting in monetary policy speculation of higher interest rates, matching similar changes overseas As a consequence, such an increase would decrease the attractiveness and price and therefore increase the yields of current bonds.

In response, 10-year Japanese government bonds hit their highest level since 2011 and three older 40-year bonds rose to 3% with bond funds experiencing a 13 7% loss in dollar terms in the first 6 months of 2024 as the worst fixed income .

This has been further exacerbated by the demands of large banks for the Bank of Japan to further reduce their bond buying practices which were initially employed to stimulate the economy Further, this bearish market has been contributed to by greater selling pressures from overseas foreign investors, in particular for medium to long term bonds. This comes as traditionally major buyers including domestic life insurers take a cautious stance ahead of the Bank of Japan’s future policy decisions.

FOREIGN EXCHANGE

Over the course of 2024, the JPY has experienced a significant decline in value Primarily, this could be attributed to the widening of interest rate differentials consequent to a global hiking cycle prompted by persistent inflationary pressures. Additionally, the yen ' s demand has been dampened by Japan's continued trade deficits, which have persisted for the third consecutive year According to the Ministry of Finance, these deficits totaled 5 89 trillion yen ($38 billion) for the fiscal year ending in March 2024 Consequently, the yen has depreciated, trading above the 150-mark against the USD, up from the 130-140 range observed in 2023.

This came despite a 20-basis point rate hike which saw the BOJ depart from its negative rate regime and yield curve control policy, whereby the BOJ would engage in bond packaging and buying activity to manage yields at around 0% However, the anticipated effects of this monetary policy shift were largely mitigated by comments from BOJ Governor Ueda. Who in a crucial interview signalled that the BOJ would not consider hikes anytime soon, adding that the BOJ’s policy would not be influenced by FX movements This prompted a further round of sell offs which saw the yen plummet to decade lows of 160 per USD

Looking ahead, resilient economic growth in major economies, such as the United States, has mitigated the typical recession risks associated with a high-interest-rate environment As a result, the demand for the yen as a safe-haven currency has decreased due to its strong liquidity, low inflation, and political stability This further contributed to the yen ' s depreciation until potential rate hikes by the Federal Reserve and other major central banks become a consideration.

On a more positive note, recovering export figures due to a tourism boom and semiconductor shortage boasts potential for recovery Recent data indicated that Japan recorded a trade surplus of 366 5 billion yen ($2 4 billion) in March 2024, spearheaded by strong export growth of 7% and a decline in import close to 5%. These factors could support a gradual recovery of the yen if sustained over the coming months

YEAR AHEAD

Japan is forecast to grow by 0 75% in 2024 and 1% in both 2025 and 2026 While Japan's economic recovery is set to continue, growth expectations remain stagnant due to the fading impact of one-off factors, such as a surge in inbound tourism. Preparedness for the Noto Peninsula Earthquake will mitigate its economic impact Core inflation is projected to decline gradually as import price effects wane, but will remain above the 2% target until the second half of 2025 due to a closed output gap and rising nominal wages. Still, recent wage negotiations imply a marked lift in the pace of nominal wages growth in 2024, which is expected to support real wages growth as inflation moderates. This, alongside households’ access to savings accumulated during the pandemic, should support a mild rebound in consumption growth High corporate profits and the strengthening of supply chains are also expected to support business investment in the near term The BOJ began withdrawing extraordinary monetary policy stimulus in March 2024 and is expected to gradually normalise its policy stance. Nonetheless, monetary policy is likely to remain accommodative for some time. The primary fiscal deficit will remain sizable in 2024 due to the latest fiscal stimulus package The current account surplus is expected to increase, driven by higher exports and lower import prices, aligning broadly with medium-term fundamentals

es for investors are high due to nal shift in Japan's economy l markets The combination of fiscal, trade, and industrial ms to enhance economic However, external factors g geopolitical tensions, in Ukraine and the Middle risks to global economic hich could impact Japan. s are balanced, with downside ding a global economic and pivot away from n Upside risks involve a bal economy and recovery of rism. For inflation, upside risks higher wages and backwardflation expectations, while sks include declining global mport prices

ernment will maintain ative fiscal policy, with sive measures introduced in combat deflation, including a yen budget for national and ding. Flat rate tax cuts are in June 2024, potentially to boost the ruling Liberal Party's approval ratings amid d scandal. Domestic pressures shortages and adjustments to nge efforts also pose risks to growth High uncertainties ms ' wage- and price-setting which could exert upward or pressure on prices. The ability wage increases to selling ains uncertain, especially for medium-sized enterprises foreign exchange rates and commodity prices could lead nt fluctuations in domestic

INTRODUCTION

China’s economy has struggled to recover from the COVID-19 pandemic, grappling with the ripple effects of a prolonged property sector crisis that has had irreversible damage on investor, business and overall consumer confidence

As forcasted by the CCP, China’s economy is projected to grow by 5 percent in 2024 and 4 5 percent in 2025, reflecting upward revisions of 0 4 percentage points for both years, driven by strong Q1 GDP data and recent policy measures.

Tensions between the US and China have reasonably eased since highs in 2023 however, there still continues to be volatility in China’s equity markets

Q1 of 2024, China’s economy expanded more strongly than expected with GDP increasing by 1 6% - higher than the market expectations of 1.4%. This growth was mainly driven by an increase in exports and manufacturing investment. However, in Q2, this was not enough to offset the real estate crisis with GDP growing only 0 8%

China’s slowing economy has also significantly impacted employment levels, especially affecting new graduates The government recently organised 64,000 job fairs in China, causing the average urban unemployment rate to decline 0 3 percentage points to 5 2% in Q1

China’s weak consumption and dragging output sector has caused their core inflation to remain significantly lower than its peers, recorded as low as 0.1% in March.

Recognizing these challenges, the authorities have focused on achieving high-quality growth by supporting innovation, especially in green and hightech sectors, upgrading financial sector regulations, and introducing some policies to mitigate property and local government risks

On a monetary policy front, the PBoC cut their 5-year loan prime rate by 0 25 basis points to 3 95%, its first time since May 2023 and the largest cut on record, while the 1-year rate remained at 3.45%. The PBoC also recently announced plans to tighten the margin for which short-term interest rates can fluctuate

FIXED INCOME

Amidst China’s real estate cr stocks, investors have turne government bonds as a safer inflation and expectations of further sent their prices soa plunging to record lows, with Ch shore government bond touch 24th June, the lowest since 20 20Y and 50Y government b hovered around historic lows

PBoC fear the risk of a similar c Valley Bank, where China’s fin have invested significant amou government bonds, making the sudden interest rate changes C

PBoC have decided to interven bond market for the first time borrow government bonds from open market and then sell th decrease bond prices and boos

On international bond markets, r costs have made it more expe issuers to borrow outside the companies, banks and gove issued only $26bn this year, sli last year ’ s $24bn but otherwise 2016.

In the real estate sector, the value of unsold homes and un projects is about 30 trillion yua Consequently, Beijing have rec to purchase vacant housing a into affordable housing, but po problems for the government China faces significant fis especially for local governm fiscal consolidation over the needed for stability, while r unsustainable debt of loc financing vehicles can help red Strengthening the bank resol and strictly applying prudenti help enhance financial stabil risks

EQUITIES

The Shanghai Stock Exchange (SSE) performance YTD has produced negative returns (-0 12%), starkly contrasted to the rally in equity markets elsewhere

2024 has proven to be a dynamic year for Chinese equity markets, starting off with the derivative-induced meltdown in January. The market downturn was triggered by investors' minimal exposure to Chinese equities. Investors are concerned Beijing lacks effective policy making tools to spark a sustainable economic recovery amidst the protracted property crisis, deflation, declining birth rates and a shrinking labour force When key index levels were reached in Hong Kong and Mainland China, it prompted the selling of index futures. The lack of buyers to counterbalance this selling pressure led to a sharp decline in the markets.

According to Goldman Sachs analysts, “Conventional macro policy easing has so far fallen short of investor expectation

A shift in the piecemeal easing playbook to a more aggressive, big-bang approach may be needed to overturn the negative narrative in the market.” In particular, an “effective government backstop” to prop-up failing property developers and to stimulate demand for housing is needed.”.

In the first half of 2024, China’s automotive industry saw higher production and sales driven by a surge in EV exports - most notably from BYD In total last year, over 70% of global EV production was from Chinese car manufacturers, with exports +64% in a single year. Shares of BYD Company saw a significant rise of +36.36% YTD despite the increase on tariffs imposed from both the US and EU Other notable growth from peers in the automotive industry were also seen from Saic Motor Corporation (+5 8%), a state-owned automobile manufacturer, and Bluepark New Energy Technology (+67.71%), a design, research and development and sales of electric automobiles.

The second half of 2024 should witness a recovery trajectory, following the release of an uncommon document from China's State Council, the country's highest administrative authority, outlining nine key points to enhance the nation's capital markets. This rare intervention from the top political body includes measures to strengthen and stabilise China's financial markets by regulating the flow of IPOs and motivating companies to increase dividend payments

decelerate, while the growth in coal purchases has significantly slowed.

Specifically, coal imports of 1H 2024 rose 13% to 204 97 million tonnes - well below the 93% growth recorded in the first six months of 2023 - in alignment with the significant increase in adoption of EVs and renewable energy sources including solar and hydropower. Still, the uptick figure of imports can be attributed to declining domestic coal production (-3 5%) during the first four months of the year, following mandated safety inspections in key coal-producing areas

In June, soybean imports surged to over 11 million tonnes, reaching a 12-month high, as traders capitalised on more affordable Brazilian supplies. However, the cumulative imports for the first half of the year still lagged 2 2% behind the previous year ' s figures Meanwhile, other agricultural commodities continued to show signs of weakening demand, reflecting the broader economic slowdown's impact on consumption patterns. Agricultural reform and food security remain paramount concerns for Chinese policymakers. The fundamental challenge lies in China's disproportionate land-to-population ratio: the country possesses only 7% of the world's arable land yet must sustain roughly 20% of the global population, as reported by JPMorgan Chase & Co research Any production shortfalls are compensated through imports

Farmers are currently grappling with declining incomes due to a combination of oversupply and weak demand, leading to depressed prices for key crops like wheat and corn Concurrently, increasingly unpredictable weather patterns exemplified by recent southern floods and northern droughts, pose a long-term threat to domestic agricultural output This climate volatility may compel China to increase its reliance on imports in the future.

REAL ESTATE

The Chinese real estate crisis has significantly affected investor confidence, economic growth, and government policy, with real estate being a cornerstone of the Chinese economy In August 2020, China introduced the "three red lines" policy, restricting the amount of new borrowing that property developers could raise annually. The policy mandates a liabilitiesto-assets ratio below 70%, a net debt-toequity ratio below 100%, and a cash-toshort-term debt ratio of at least 100% This created significant challenges for the overleveraged property developer market, leading to many defaults, including Evergrande, which faced a US$300 billion debt crisis

The IMF (2024) projects that Chinese real estate investment may fall by another 3060% relative to 2022 levels with a gradual

The IMF's projections are driven by several key factors One significant driver is the unaddressed property sector vulnerabilities, where many developers remain non-viable but avoid bankruptcy due to rules allowing lenders to delay the acknowledgement of ‘bad loans’ Another driver is rising demographic pressures, with population decline and slowing pace of urbanisation reducing housing demand in urban areas Additionally, the disparity in the price-to-income ratio highlights the heavy reliance on debt for housing purchases in China. In Tier 1 cities, the ratio is 14x, while in Tier 2 to Tier 5 cities, it ranges between 5x and 10x (see Figure 1)

In 2024, the Chinese government introduced a support package to assist homebuyers, which includes lower down-payment requirements and US$42 billion in bank funding to help government-backed entities purchase excess inventory from developers for conversion into affordable housing However, the short-term effects of this policy have been minimal, and it does not address the structural issues, making long-term success unlikely

With approximately 75% of Chinese household wealth stored in real estate, declining prices and expectations of further decreases reduce household equity and increase mortgage payments Consequently, increased spending on affordable housing is

RISKS & OUTLOOK

China is grappling with significant geopolitical challenges involving major global powers These include territorial disputes and military build-up in the South China Sea, heightened tensions with Taiwan, and ongoing border conflicts with India Additionally, human rights concerns, trade imbalances, and tariffs on foreign goods have strained relations with Australia and the European Union.

In late 2023, China attempted to improve relations with Australia by lifting a ban on coal imports and reducing tariffs on barley However, Australia's alliance with the United States continues to strain bilateral ties. Tensions between China and the U.S. have intensified, driven by fears over Taiwan and other territorial disputes. The U.S. has increased tariffs from 10% to 25% on $200 billion of Chinese imports, with further hikes threatened Moreover, China and Russia are moving to reduce their reliance on the U S dollar in trade to mitigate sanctions' impacts These geopolitical tensions pose substantial risks to China's international relations, trade, and foreign direct investment (FDI). Disruptions to supply chains and reduced market access could undermine economic stability and growth. Managing these challenges and fostering better diplomatic ties will be crucial for maintaining China's economic trajectory

China faces significant structural risks within its economy, with real estate accounting for approximately 20-30% of economic activity. However, the sector continues to undergo a downturn due to the CCP's implementation of the three red lines policy aimed at addressing excess leverage in the market This policy has notably reduced foreign direct investment in the Chinese real estate market As a result, households that heavily rely on real estate as 75% of their wealth, have seen their equity diminish, leading to higher mortgage payments and reduced spending capacity. This trend has further heightened the country's accumulated debt risks.

Moreover, elevated youth unemployment in China stems from educational mismatches exacerbated by urban-rural migration The country's economic transition from industrial to serviceoriented sectors has intensified job market competition, amplifying structural issues such as discrimination based on gender, age, and rural background, which hinder access to quality employment opportunities This unemployment issue contributes to economic inefficiencies, reducing consumer spending and slowing economic growth.

Additionally, to counteract the slowing population growth resulting from the one-child policy, the Chinese government has introduced initiatives aimed at promoting childbirth These measures, however, may take time to address the underlying demographic challenges impacting the labour market and economic stability.

Based on these factors, the cautious optimism in China's economic outlook for FY24/25 appears grounded in strategic policy responses aimed at stabilizing key sectors like real estate and addressing demographic challenges The continuation of monetary easing and targeted fiscal measures suggests a proactive approach by Chinese authorities to manage economic risks and support growth

Ultimately, the trajectory of China's economy will depend on a complex interplay between domestic policy effectiveness, global economic conditions, and geopolitical developments, all of which will shape the actual outcome and sustainability of its economic optimism in the coming fiscal year.

INTRODUCTION

The United States is forecast to grow by 1.8% in the first half of 2024, driven by resilient consumer spending, a strong labour market, and ongoing fiscal support. Despite these positive indicators, several headwinds could impact the economic outlook, including tightening monetary policy, geopolitical uncertainties, and persistent inflationary pressures.

The U.S. economy is expected to experience moderate growth, following a robust recovery postpandemic Consumer spending, which accounts for a significant portion of GDP, continues to drive economic activity, albeit at a slower pace compared to previous years

This deceleration is partly due to the diminishing effects of pandemicrelated fiscal stimulus and higher borrowing costs stemming from the Federal Reserve's interest rate hikes

The Federal Reserve's monetary policy is expected to play a crucial role in shaping the economic landscape in 2024. With inflation moderating but still above the target, the Fed is likely to maintain a cautious stance The federal funds rate is anticipated to remain at its current range of 5.25%-5.5% through mid2024, with potential rate cuts beginning in the second half of the year if inflation continues to ease

Quantitative tightening is projected to persist, with the Fed reducing its balance sheet at a steady pace

MACROECONOMIC OUTLOOK

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MONETARY POLICY

The Federal Reserve kept interest rates high at 5 25-5 5% as anticipated at the July meeting, even as the economy cooled significantly US Policymakers have remained steadfast in their decision to maintain higher rates to combat the elevated spell of inflation off the back of the Fed’s aggressive quantitative easing and the US government’s fiscal splurges in 2020 and 2021. Hopes are for the US to achieve a soft landing, where inflation falls back to the Fed’s goal of 2% without spiking unemployment

However, the latest report of a fourth consecutive monthly rise in unemployment to 4.3% alongside share market turmoil has resulted in weakened consumer confidence The Fed is likely to move cautiously and incrementally, with the argument that the share market is to a large extent more volatile than the central bank Guidance has markets expecting a 25 basis point interest rate cut in September, followed tentatively by a further 25 basis point cut post-election.

ASSET CLASSES

EQUITIES

In the first half of the year, the S&P 500 increased by almost 15% led primarily by the perform few mega-cap stocks while the D Industrial Average by around 4%. Th experienced a significant surge climbin 18%, in alignment with market surrounding artificial intelligence dev and anticipation of rate cuts from th Reserve.

Despite experiencing stubborn inflation highest rates in two decades, the earni Magnificent 7 have been a key catalys level growth, priced at around 34 time Ten of the eleven large cap sectors wer the first half of 2024, driven by outsize Technology (28 2%) and Communicatio whilst REITs were in the red (-2.4%).

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FIXED INCOME

US Treasury yields trended higher for the first portion of 2024 before a recent pullback. Starting 2024 below 4%, yields on the 10-year Treasury surged to a peak of 4.70% in April. As bond values decline when yields rise, this saw total bond returns in the first half of the year were in negative territory However, yields have since retreated and fell to as low as 4 16% mid-July With investors widely anticipating a September interest rate cut by the Federal Reserve, appetites for bonds have been elevated and driven long-term interest rates lower.

Global elections and corresponding fiscal policy uncertainty may influence government debt pricing, pushing term premia higher and thus decreasing the attractiveness of longer maturity exposures Conversely, the front end of the yield curve (2-5 year maturities) emerges as more attractive given the closer alignment between the bond market and Fed rate cut expectations improving the trade-off between carry and potential rate volatility.

Overall, the combination of a resilient US economy, easing inflation, attractive starting yields, and expectations for a Fed rate cut present a healthy backdrop for fixed income. Potential election-related volatility remains a significant consideration. However, ahead of this, many fixed income asset classes are positioned for potential outperformance into the second half of the year

REAL ESTATE

“The US real estate market continues to be a significant alternative asset class, remaining attractive due to the stability and predictability of cash flow it can provide and long-term capital growth opportunities. In 2024, the market is navigating a complex landscape shaped by macroeconomic factors, regulatory changes, and evolving consumer preferences as living affordability becomes an overarching concern for American consumers.

n 2023, the US real estate market demonstrated resilience despite economic headwinds, with home prices showing a mixed trend. The Federal Reserve's monetary policy has significantly impacted the market, with higher interest rates increasing borrowing costs and leading to a slowdown in home price appreciation and a reduction in sales volume. Predictions suggest that mortgage rates may stabilise or decrease slightly in 2024 if inflation continues to subside. As of mid-2024, the average 30-year fixed mortgage rate stands at approximately 6.8%, down from the peak of over 7%.

YEAR AHEAD (2024-2025)

The second half of 2024 brings new challenges with the largest being the November election. In addition, experts are concerned with the potential for sustained high performance with the remainder of the year given the existing concentrated growth and increased uncertainty.

Traditionally, presidential election years have delivered strong returns for investors as shortterm macroeconomic policy tends to gear to the interest of the American public heading to voting booths. In particular, returns have been positive for Democrats in 11 of 12 instances; for Republicans, it was 8 of 12. However, with the sudden rotation of leadership in the Democratic Party and the attempted assassination of the former president and running leader of the Republican Party alongside the escalation of existing global conflicts in Ukraine and the Middle East presents a general sense of cautious optimism.

Int there is expected to be one or two interest rate cuts coming in September or December, indicative of an impending soft landing. Specifically, the slowing manufacturing activity and retail sales and a weakening labor market reflect a return to normal as the market takes a breath from unsustainably high levels of performance.

INTRODUCTION

Canada is forecast to grow by 0.9% in 2024, 1.4% in 2025, and around 1.8% by 2026. The Canadian economy has faced significant challenges recently, including high inflation, rising interest rates, and global economic uncertainties Despite these headwinds, resilient consumer spending and strong labor market fundamentals are expected to support moderate growth over the forecast period.

Since the onset of the COVID-19 pandemic, Canada's economic recovery has been uneven, with certain sectors rebounding more robustly than others The energy sector, in particular, has seen substantial gains due to higher global oil prices, while sectors like tourism and hospitality have struggled to return to pre-pandemic levels Inflation, which peaked at 8.1% in mid-2022, has been a persistent issue, driven by supply chain disruptions, elevated energy prices, and robust demand.

The Bank of Canada's monetary policy will play a pivotal role in shaping the economic outlook in 2024 After a series of rate hikes that brought the policy rate to 5 0% by the end of 2023. However, rates are now decreasing in aims to support economic activity by reducing borrowing costs for consumers and businesses.

Consumer spending, which constitutes a significant portion of Canada's GDP, continues to be a key driver of economic activity Despite higher borrowing costs, household consumption has remained relatively robust, supported by rising wages and government transfer payments. However, the housing market has shown signs of cooling, with rising mortgage rates dampening demand and price growth

In summary, while Canada faces several headwinds, the overall economic outlook remains cautiously optimistic The combination of resilient consumer spending, a strong labor market, and prudent monetary policy is expected to support moderate growth over the next few years.

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MONETARY POLICY OUTLOOK

In 2024, the BoC has generally maintained a cautious approach to monetary policy amidst ongoing efforts to control inflation and support economic stability As of June 2024, the BoC has adjusted its policy interest rate to 4.75%, a reduction of 25 basis points from previous levels. This marks a shift from a contractionary stance to a more neutral position, reflecting increasing confidence in the progress made against inflation

Inflation has shown signs of moderation, with projections indicating it will remain around 3% in the first half of 2024, easing below 2 5% in the latter half of the year and returning to the target of 2% by 2025. Specific categories, such as grocery prices, have seen significant reductions, from a peak of 11 4% in January 2023 to 2 4% in February 2024

Moreover, the Canadian economy has shifted from a state of excess demand to one of excess supply Growth has stalled since mid-2023, with consumer spending and business investment contracting. The labor market has also shown signs of easing, which has contributed to the reduction in inflationary pressures.

Moving forward, the BoC's current focus is on how long the policy rate needs to remain at its current level to ensure price stability. The central bank's decision to lower the interest rate slightly while adopting a dovish stance reflects a balanced approach to managing economic growth and inflation. Overall, the BoC's monetary policy in 2024 aims to sustain the progress made in reducing inflation while supporting economic stability through careful adjustments to the interest rate and monitoring of economic conditions.

ASSET CLASSES EQUITIES

The Canadian equities market has exhibited robust performance throughout 2024, driven by significant sectoral gains and an overarching positive market sentiment The S&P/TSX Composite Index reached a historic peak of 22,269 1 points in May 2024, underscoring the strong investor confidence and favorable economic conditions prevailing in the market

As of mid-2024, the S&P/TSX Composite Index has recorded a YTD gain of approximately 5.32%, continuing its upward trajectory from a solid return of 11.8% in 2023. The index advanced by 6 6% in the first quarter of 2024, reflecting the resilience and growth potential across various sectors The market's overall market capitalization has surged to CAD 3 7 trillion, representing a 4 5% increase from the previous year Trading volumes have also seen a notable rise, with an average daily volume of 600 million shares, up 7% compared to 2023.

Sectorally, Technology has led the way, surging by 12 4% YTD, driven by ongoing innovation and the expansion of digital services Companies within this sector have benefited from increased demand for technology solutions and services, contributing significantly to the index's overall growth. Consumer Discretionary has exhibited strong growth potential, with a 6 8% increase, driven by increased consumer spending and confidence Companies in this sector have benefited from favorable economic conditions and strategic market positioning, leading to robust earnings and market performance While the Energy sector faces challenges from fluctuating commodity prices, it has managed a modest gain of 3.2%, expected to benefit from improved cash returns and strengthened balance sheets. Companies in this sector have focused on enhancing operational efficiencies and optimizing capital allocation, positioning themselves for future growth

The positive trajectory of the Canadian equities market in 2024 is supported by several key factors. Easing inflation, currently at 2.1%, has contributed to a more stable economic environment, fostering investor confidence. The BoC's measured approach to interest rates, maintaining the benchmark rate at 1 75%, has provided a conducive backdrop for market growth Key sectors such as Technology, Financials, Communication Services, and Consumer Discretionary have demonstrated strong performance and growth prospects Additionally, Canada's GDP growth rate of 3.0% in the first half of 2024 and an unemployment rate holding steady at 5.3% further underscore the favorable economic conditions

D INCOME

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CARBON CREDIT

The carbon credit market is a growing industry, viewed as an attractive new investment opportunity. The growth of the clean energy transition to mitigate the acceleration of global warming in addition to ambitious net-zero goals of several large Canadian corporations provides a logical case for a forward-looking risk premium. The Canadian carbon credit market was estimated to be valued at USD 1,797 7 million in 2024, with projections to reach USD 3,365 2 million by 2031 (CAGR of 11 2%), indicating significant growth potential.

This year, the government pledged to continue funding Carbon Contracts for Difference (CCfDs), financial instruments with the purpose of hedging against price volatility, beyond the initial $7 billion allocation announced in the previous year. This program could deliver 33 megatonnes of additional decarbonization by 2030

YEAR AHEAD: 2024-25

Canada's economic outlook for 2024-25 is cautiously optimistic, with moderate growth expected amidst ongoing challenges and uncertainties The economy is projected to grow by 0 9% in 2024 and 1 4% in 2025, driven by easing inflation, supportive monetary policy, and resilient consumer spending.

Consumer spending is expected to remain resilient, supported by rising wages and government transfer payments, but higher borrowing costs will continue to weigh on household consumption Investment activity will face mixed prospects Gross fixed capital formation is anticipated to decline by 0 8% in 2024 due to reduced residential and business investment amidst high-interest rates. However, sectors such as technology and clean energy are expected to attract significant investment, driven by government incentives and the global push towards sustainability Additionally, the housing market is projected to stabilize, with modest growth in housing starts as demand recovers from the previous downturn

Geopolitical uncertainties and global economic trends will also impact Canada's economic trajectory Trade tensions, particularly with the United States and China, and potential disruptions in global supply chains pose risks to the outlook Additionally, Canada's economic performance is closely tied to the health of the US economy, given the strong trade and investment linkages between the two countries.

Fiscal policy will focus on balancing fiscal discipline with necessary investments to f

B3 - Brazil Stock Exchange

INTRODUCTION

South America, the fourth-largest continent, is predominantly characterised by emerging markets, with Brazil at the forefront. The region's economy is centred on the export of diverse natural resources and while South America has largely rebounded from the economic impacts of the COVID-19 pandemic, persistent structural challenges, such as low productivity and a 4 25% decline in fertility rates in 2023, raise concerns about the sustainability of future economic growth.

Trade tensions have become evident, as demonstrated by Argentine President Javier Milei's abstention from the Southern Common Market (Mercosur) biannual meeting this July. The trading bloc has arguably introduced more trade barriers than it has removed, complicating tariffs and trade in similar goods among member countries Consequently, intra-bloc trade remains relatively low, at around 15% Political instability within South America has further intensified, highlighted by the assassination of Ecuadorian presidential candidate Fernando Villavicencio in 2023, contributing to an increasingly uncertain investment climate Equity markets and macroeconomic reforms in the region are highly susceptible to geopolitical events and investor sentiment with regards to regional stability.

On the other hand, the region remains a crucial player in the renewable energy sector and looks to benefit from the global shift towards net-zero initiatives. This is underpinned by substantial investments from China, which has established itself as a leading investor in Latin America's electricity market Notably, Brazil is at the forefront of the 'wind rush' from 2023 into 2024 and continues to consolidate its dominant position in the region's solar panel industry

MACROECONOMIC OUTLOOK

Decades of significant economic growth and development within South America have notably stalled during recent years In Q4 of 2023, South America experienced modest growth that fell short of market expectations, due to the delayed effects of monetary tightening GDP growth forecasts of 1 6% in 2024 by the UN is poised as a low statistic both internationally and historically. This is characterised by chronic hyperinflation elevated by residual effects Covid-19, translated into high fiscal deficits and elevated interest rates Further, low levels of domestic investment coupled, declining commodity prices and uncertainty in future trading with prominent partners with the US, China and other G7 countries are potential factors for dampening GDP

Inflation has remained high, yet is decreasing. Notable countries including Argentina and Venezuela have retained extremely high March inflation figures of 287% and 68 8% respectively However, many Latin American countries such as Brazil and Chile have reached inflation figures of 4 23% and 4 2%, which is around 1% above the target range. Generally, in South America inflation expectations in 24 months are projected to be in target ranges but currently are above this threshold. Further, countries such as Bermuda, Ecuador and El Salvador have inflation between 12%

The unemployment rate in Latin America is projected to remain around 6% in 2024 There is a disparity, however, in subregions such as Columbia where unemployment runs rampant at 9 9% due to a slowdown of job creation from 2 5% to 1 2% in the year to February 2024 Ecuador on the other end had a considerably lower unemployment rate of 4.2%. Youth unemployment stood at 13 3% and is expected to increase in 2025

Independent central banks in Chile, Peru, Columbia and Brazil continue to cut rates As inflation begins to slowly fall and in concurrence with speculation for Fed rate cuts, many countries are implementing expansionary monetary policy, and reiterating their cash rates such as Mexico at 11%, Peru at 575% and Brazil at 10.5%. Argentina notably reiterated their 58.98% cash rate in May as monthly inflation decreased to 8% from December highs of 25% under new President Javier Milei’s severe austerity program

MONETARY POLICY EQUITIES

The B3 SA is the largest stock exchange in South America, located in Brazil In H1, the B3 plunged by 26.3%, after reaching an all-time high at the end of 2023 This decline was mainly driven by a retreat of foreign investors from the Brazilian stock market due to shifting expectations for the US Federal Reserve As a result, this uncertainty meant that investors tended to avoid higher-risk emerging market assets Furthermore, the less ambitious fiscal targets in 2025, unclear impacts of flooding in the south and fears of political instability further increased pessimism on Brazilian equities, contributing to this stock decline.

Moreover, with Brazil being the second largest producer of iron ore, the weak steel production in China at the beginning of the year meant that there was a global decline in iron prices This caused Vale shares to drop 1565% in H1, which also heavily weighed on the B3.

FIXED INCOME

In January, Brazil raised US$45 billion from its new issue of 10-year and 20-year bonds, with demands for the bonds exceeding $12bn The high demand was due to expectations for US rate cuts, hastening investors into secure fixed-rate bonds at current rates This demand led the yield on the 10-year bond to decrease from 662% to 6.35% and the 20-year bond to decrease from 7.5% to 7.15%.

Moreover, on June 15, Brazil announced its second issuance of sustainable bonds on the international market, after their first issuance of sustainable bonds successfully raised US$2bn in November 2023 60% of the funds raised will be dedicated to environmental initiatives with the remainder allocated to social expenses

Argentina’s international bonds experienced major gains in March with the 2029 and 2030 issue reaching record high prices in March, driven by expectations of President Milei’s austerity program improving the economy This program involved drastically slashing public spending and suppressing wages Notably, the government launched a debt swap in March, where 55 trillion pesos (US$65bn) worth of local bonds due 2024 was exchanged for bonds with maturity dates ranging from 2025 to 2028. This was an attempt to ease pressure on public repayments amidst Argentina’s economic crisis Furthermore, despite slowing inflation, bond prices still remain strong as it is still a relatively safer investment asset in comparison to short-term fixed rates and FXlinked bonds However, though the program has been successful in slowing inflation, it has significantly increased unemployment and poverty rates, exacerbating Argentina’s economy

CURRENCIES

The foreign exchange landscape in South America for 2024 is marked by significant volatility and country-specific challenges. The Brazilian Real (BRL) is expected to remain under pressure due to uncertainties surrounding US Federal Reserve rate cuts Analysts predict that if the Fed delays cuts, the real could weaken further, potentially trading around BRL 5 40 per USD However, Brazil's strong trade surplus, projected to reach $85 billion in 2024, may provide some support to the currency. This surplus is driven by robust exports of crude oil and grains, which are critical to the nation's economic stability.

Chile’s peso (CLP) has been one of the worst-performing currencies globally this year, suffering from drastic rate cuts by the central bank aimed at stimulating the economy The currency ' s high volatility is exacerbated by fluctuating commodity prices, particularly copper, which is a major export. The Chilean central bank’s aggressive monetary easing has raised concerns among investors, contributing to the peso ' s depreciation.

Colombia's peso (COP) is facing challenges from fluctuating commodity prices and political uncertainties. The central bank's cautious approach to monetary policy, aiming to stabilize inflation, is expected to influence the currency ' s performance Colombia's dependence on oil exports makes the peso particularly vulnerable to global oil price volatility, which could lead to further depreciation if prices fall

Geopolitical uncertainties and global economic trends also impact the FX landscape in South America. Trade tensions, particularly with the United States and China, and potential disruptions in global supply chains pose risks to the region's currencies. Additionally, South America's economic performance is closely tied to the health of the US economy, given the strong trade and investment linkages Investors and policymakers in South America will need to remain vigilant and adaptable to navigate these complex dynamics

YEARAHEAD2024-25

The economic outlook for South America in 2024-25 is characte growth, weak consumption, and elevated interest rates, which significant challenges for the region's development The Wo regional GDP growth to be 16% in 2024 and 23% in 2025, rates t to drive substantial prosperity or reduce poverty effectively This slow growth is largely due to persistent structural issues such as low capital accumulation and productivity growth, combined with external economic pressures.

Low economic growth is expected to exacerbate several socio-economic problems across South America Reduced public services, lower salaries, and higher levels of poverty and inequality are significant risks. The region's economies have struggled to regain the advances made in poverty reduction over the past decade, and the ongoing slow growth threatens to reverse these gains. Public investment remains crucial, but fiscal constraints limit the capacity for expansive economic stimulus

Geopolitical uncertainties and global economic trends will continue to impact South America significantly. Trade tensions, particularly between the United States and China, and potential disruptions in global supply chains pose considerable risks The economic performance of the US, given its strong trade and investment linkages with South America, will also play a critical role in shaping the region's economic trajectory. Additionally, geopolitical tensions in the Middle East and Europe can lead to volatility in global markets, further influencing South American economies

Inflation rates across South America are projected to decline gradually, but they will remain a concern. High interest rates, which have been used to curb inflation, are expected to persist, thereby dampening investment and consumption. This monetary tightening has already led to reduced economic activity and will likely continue to do so into 2025 Nonetheless, some countries might benefit from stabilizing commodity prices, which could provide a moderate boost to their economies.

INTRODUCTION

Since the onset of the COVID-19 pandemic, the United Kingdom's (U K ) economy has encountered sluggish growth, narrowly avoiding a recession, and has been ranked as the second lowest among G7 economies since the fourth quarter of 2019. Several factors have contributed to this economic stagnation, including persistent trade disputes following Brexit, the ongoing repercussions of the pandemic on the U K labor market, and elevated inflation rates over the past two years

Inflationary pressures have notably impacted household expenses, with the Consumer Price Index (CPI) reaching a peak increase of 6 8% in July 2023 This surge was partially fueled by rising energy prices due to the conflict in Ukraine and heightened global demand for oil and gas in the post-pandemic era

The U.K. economy faced a technical recession in the latter half of 2023, driven by high energy costs, cost-of-living pressures, restrictive monetary policies, and increased export challenges exacerbated by ongoing trade frictions with the European Union (EU) post-Brexit Despite these difficulties, economic forecasts suggest modest growth rates of 0.5% in 2024, 1.25% in 2025, and 1.5% in 2026. This projected recovery is expected to be supported by improving real income growth, a moderation in inflation, and anticipated adjustments in monetary policy

In the first quarter of 2024, the U K economy demonstrated resilience with a growth rate of 0.7%, surpassing economist expectations of 0.6% and leading the G7 in growth during that period. This rebound was bolstered by the Bank of England's higher interest rates and the implementation of a lower price cap, which effectively reduced gas and electricity costs Consequently, inflation eased to 2 0% by May 2024

MACROECONOMIC OUTLOOK

Over the year of 2023, the UK economy faced significant challenges. The fourth quarter saw a 0.3% quarter-on-quarter contraction, finishing up the year just narrowly avoiding a recession (GDP growth of just 0 1% for the year) Although lower energy prices provided some relief to household incomes, this benefit was offset by the withdrawal of fiscal support measures and increased taxes, which led to only a modest 0 3% growth in consumption Goods trade contracted sharply, while services trade experienced robust growth, leading to a marginally positive contribution from net exports.

In early 2024, economic indicators showed signs of improvement The services Purchasing Managers' Index (PMI) indicated expansion, though the manufacturing PMI continued to reflect contraction Monthly GDP data suggested slight expansion in the first quarter of 2024, supported by rising consumer confidence from historically low levels.

Looking forward, household consumption is expected to remain subdued in 2024, with gradual improvement anticipated as fiscal consolidation eases and monetary policy remains accommodative. Public consumption is projected to grow strongly in 2024 before moderating in 2025. Investment faces challenges, with a forecasted decline in 2024 due to weak manufacturing and reduced public and residential investment Services trade growth is expected to stabilise in 2024, with a modest recovery projected for 2025

Labour market conditions tightened in early 2024, evidenced by an increase in unemployment to 4 4% from 4 3% in the previous quarter the highest rate since September 2021 Employment growth turned negative, and average weekly earnings growth moderated to 6 2% in February 2024 Immigration, particularly from non-EU countries, has expanded the labour force, which has helped mitigate wage pressures, though uncertainties about labour market slack persist.

MONETARY POLICY OUTLOOK

The Bank of England (BOE) has chosen to maintain its restrictive monetary policy stance, keeping the Bank Rate steady at 5 25% (as of June 2024) The decision reflects a nuanced balance within the Monetary Policy Committee (MPC), with a minority of members advocating for a 25 basis point cut to stimulate economic activity.

The BOE's decision contrasts with recent moves by the European Central Bank and the Swiss National Bank, underscoring divergent monetary policy paths

Despite this, the UK economy has demonstrated resilience, with GDP growth surpassing expectations in the first half of the year, largely driven by robust consumer demand and stronger-than-anticipated housing investment However, business surveys suggest a slower underlying growth trend of approximately 0 25% per quarter Inflation has moderated to the 2% target, down from 3 2% in March, primarily due to easing energy prices. Nonetheless, services inflation remains high at 5.7% as of May, raising concerns about persistent inflationary pressures.

Quantitative tightening by the Bank of England has also slowed, with holdings of government bonds decreasing from a peak of £875 billion to £696 billion This reduction reflects ongoing adjustments in monetary policy aimed at managing economic conditions.

Looking ahead, market expectations anticipate that the BOE may implement its first rate cut in four years in August 2024, with further reductions potentially occurring in November. The BOE remains attentive to global economic trends, noting synchronised growth moderation across advanced economies and ongoing challenges in labor markets. Overall, the BOE aims to maintain the 5.25% rate while striving for sustainable inflation close to the 2% target

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However, Labour’s victory also brings potential regulatory changes and a more stable economic outlook for the UK The large stability and reduced volatility in the UK compared to other regions in Europe contribute to a more favourable environment for equities, which is partly due to its growth rebound amid positive real-income growth and improving sentiment with headline inflation returning to target. This should also positively impact house-builders and construction materials by reinstating house building targets and funding local planning departments.

Both Labour and Conservative parties now view big cap banks more favourably due to their necessity in investment and lending to the economy. The new government is also expected to push for the UK’s transition to renewable energy, requiring significant infrastructure investment

Despite uncertainties, the general UK economic outlook has improved, making UK equities a more attractive opportunity than over the past year due to their wide discount compared to other markets.

FIXED INCOME

The London Stock Exchange (LSE) supports a wide range of fixed income products, offering a market that provides issuers the ability to reach a global investor base These include products such as the plain vanilla bonds, gilts and sukuk. Further, the introduction of the LSE’s innovative sustainable bond market provides opportunities for green, sustainable and social bonds in conjunction with other similar fixed income products. This consequently improves access and transparency for investors in response to rising demands for companies to manage climate risks

The recent UK election which saw the victory of Keir Starmer for the Labour party in addition to expectations surrounding future interest rate changes are expected to significantly influence the government bond market The new government’s tax and spending plans are similar to its predecessor, resulting in a relatively stable reaction. However, expectations for the maintenance of tight fiscal policy to control inflation and for interest rate cuts have led many to believe these events will increase the attractiveness of government bonds in the long term, with signs of such a reaction already evident. The yields for UK’s current 10-year government bonds sit at approximately 4 1%, their decline since the election indicating the consequent increase in the market price and attractiveness of these gilts.

REAL ESTATE

Real estate has long been regarded as a lucrative investment asset class, offering both capital appreciation and rental income Investors often turn to real estate for its potential to hedge against inflation and provide steady returns Over the past 15 years, the UK housing market has seen substantial growth with house prices increasing by +44% nationally, with the growth figure spiking at +74% since 2007 when looking specifically The COVID-19 period further accelerated this trend, with a 20% price rise

The UK real estate market has experienced volatility recently, largely driven by rising interest rates. Mortgage rates have climbed, putting downward pressure on house prices. House prices have been on a downward trend since July 2022, and this could continue due to sustained higher borrowing costs The International Monetary Fund notes that a one percentage point increase in real interest rates typically slows house price growth by about two percentage points With the Bank of England not showing signs to cut rates until late 2024, mortgage rates are expected to rise further, impacting affordability and dampening demand.

The UK housing market's volatility is further indicated by new inquiries and deterioration in mortgage approvals, suggesting a potential double-digit decline in house prices Furthermore, the proportion of new purchase mortgages with terms over 30 years has increased, highlighting affordability concerns. Despite these challenges, supply constraints and a tight labour market have provided some support for house prices The number of new homes built in 2021/2022 fell short of the government’s target, and available properties for sale decreased by 12% in June 2023 compared to June 2019 This structural mismatch between supply and demand helps to stabilise prices.

Looking ahead, the UK real estate market faces a complex outlook Supply constraints are likely to persist, limiting significant price declines While rising mortgage rates could lead to further price reductions While the market’s performance in 2023 poses ti

YEAR AHEAD 2024-25

The United Kingdom is projected to grow by 0.5% in 2024 and 1.25% in 2025. After a technical recession in the second half of 2023 driven by high energy costs, cost-ofliving pressures, restrictive monetary policy, and a decline in exports due to postBrexit trade frictions, the economy is expected to recover modestly Real income growth, bolstered by moderating inflation, will support consumption growth, with easing monetary policy also providing a boost.

The UK government's fiscal policy in 2024 and 2025 will focus on balancing fiscal discipline with necessary investments to stimulate growth The budget will include measures to support infrastructure development, particularly in housing and renewable energy projects. A significant portion of the budget will be allocated to public services and social support to mitigate the impact of cost-of-living pressures on households. Tax policies will be adjusted to encourage business investment and consumer spending, with potential tax reliefs for SMEs to foster innovation and growth The government also plans to implement measures to increase housing supply, addressing long-term structural issues in the real estate market

Geopolitical issues will continue to play a significant role in shaping the UK’s economic landscape in 2024 and 2025 The ongoing tensions in Ukraine and the Middle East pose risks to global economic stability, potentially affecting energy prices and supply chains. The UK's reliance on imported energy makes it vulnerable to price volatility, having a direct impact on inflation and economic growth. Brexit-related trade frictions remain a challenge, particularly affecting exports and the financial services sector The need to establish new trade agreements and navigate regulatory divergences with the European Union continues to create uncertainty for businesses In conclusion, the UK economy is poised for a period of cautious recovery in 2024/25. While challenges remain, the easing of inflationary pressures and supportive government policies are expected to foster gradual improvement in economic conditions

INTRODUCTION

Achieving stable inflation without sacrificing economic growth is within reach for Europe's economies, but it won't be without challenges. Over the next few quarters, strong labour markets are expected to boost incomes and consumer spending, helping to offset the withdrawal of government support and encouraging business investment as interest rates ease However, sustaining lower inflation rates will depend on improving productivity and restoring corporate profits in the wake of increased consumer demand

Achieving stable inflation without sacrificing economic growth is within reach for Europe's economies, but it won't be without challenges Over the next few quarters, strong labour markets are expected to boost incomes and consumer spending, helping to offset the withdrawal of government support and encouraging business investment as interest rates ease However, sustaining lower inflation rates will depend on improving productivity and restoring corporate profits in the wake of increased consumer demand

Accelerated rises in input costs, potentially fueled by higher oil prices and wages, are raising concerns Meanwhile, service sector businesses have accelerated their price hikes, indicating a likelihood of sustained services inflation Recent elections in France have severely shifted political dynamics, introducing uncertainty that could impact economic policies and business confidence across the region.

In response to these economic conditions, the European Central Bank has cautiously kept rates at 4 25%, aligning with policies of other major European banks Headline inflation in the EU has decreased slightly from 2 6% to 2 5%, reflecting stabilising price pressures despite ongoing concerns about cost increases These concerns involve an accelerated rises in input costs possibly due to both increased oil prices and notably higher wages, while the likelihood of a sustained survived inflation has been made clearer through, service sector businesses also speeding up their price hikes

Looking ahead, the European Commission projects modest economic growth with GDP expected to grow by 1% in 2024, accelerating to 1.6% by the end of 2025. Private consumption among EU residents fueled by increases to real wages and employment levels is expected to be the main driver of this slow growth The Commission measured the EU's overall economic growth rate in the first quarter of 2024 at 0 3%, exceeding earlier expectations During the first half of 2024, Europe has ultimately continued to navigate a balancing act of managing inflationary pressures and stimulating economic growth through prudent fiscal and monetary policies, with the outlook cautiously optimistic but contingent upon navigating uncertainties in political landscapes and global economic conditions

MACROECONOMIC OUTLOOK

The EU economy in the first half of 2024 reflects a complex landscape marked by cautious optimism and underlying challenges Following a sluggish period, GDP growth for the first quarter showed resilience, though slightly below potential at 0 3%, it exceeded expectations, suggesting a gradual rebound This growth pattern mirrors the broader euro area ' s emergence from a mild recession in late 2023. Inflationary pressures continued to ease, with the euro area targeting a 2% inflation rate by 2025, supported by declining energy prices and stabilising service sector costs The European Central Bank's policy stance, delaying initial rate cuts to December 2024 amid global economic uncertainties, underscores the cautious fiscal approach within the EU

Despite the EU's historically low unemployment rate of 6.0%, signs of labour market softening include stagnant work hours and reduced job vacancies. Nominal compensation per employee rose by 5 8% in 2023, indicating wage growth tempered by inflation Looking ahead, the EU anticipates creating 2 5 million jobs by 2025, though employment growth is expected to moderate Investment trends are mixed, with robust non-residential construction buoyed by government infrastructure initiatives, contrasting with declining housing investments due to inventory imbalances and falling prices.

Globally, economic dynamics present challenges, with EU exports facing subdued global demand for goods Nonetheless, the EU managed to increase its export market share, offsetting losses in some member states. Economic growth outside the EU is projected to marginally improve, with the US showing unexpected resilience amidst persistent inflationary pressures China's economic resurgence promises to bolster global trade, potentially benefiting EU exports of goods and services, forecasted to grow by 1 4% in 2024 and 3 1% by 2025

Looking forward, the EU's GDP growth is projected at 1.6% in 2025, slightly revised downwards, with the euro area expecting a 1 4% expansion Southern EU countries continue to outpace their northern counterparts, enhancing economic convergence within the union This trend bodes well for newer member states, facilitating sustained economic growth Core inflation, excluding volatile energy and food prices, is expected to align with headline inflation, facilitating a gradual decline to 2% by early 2025. The GDP deflator is also anticipated to decelerate, reflecting easing wage pressures and improved productivity

The European outlook is further influenced by external factors such as the Federal Reserve's decision to halt rate cuts and ongoing political uncertainties within the EU. The convergence of GDP growth and policy rates between the EU and the US is expected, albeit against a backdrop of persistent global economic uncertainties Looking ahead, a rebound in productivity and moderated wage growth is pivotal for sustaining economic momentum The EU's strategic emphasis on fiscal reforms, structural adjustments, and enhancing growth prospects underscores a proactive approach to economic challenges. While economic convergence within the EU is progressing, disparities persist between southern and northern/western Europe, necessitating continued policy efforts to foster inclusive growth across all Member States

In June, the ECB made the decision to cut the key interest rate by 25 basis points to 3 75% from a record high 4%, marking the first lowering of the rate in 5 years. Although the ECB has historically been slower to pivot on monetary policy, this move comes before both the Federal Reserve and Bank of England However, moving first risks a likely depreciation of the euro against the dollar, resulting in imported inflation The ECB is expected to take a measured approach to the speed of lowering interest rates further, particularly given the political upheaval in France and its impact on inflation Still, there are expectations for rate cuts later this year as a result of easing inflation, as well as to combat sluggish growth from a period of economic stagnation.

MONETARY POLICY FIXED INCOME

Despite signs of easing inflation early in the year, heightened tensions in the Middle East and a prevailing risk-off sentiment led to a rebound in European inflation to 2 6% in May As a result, European bond markets mirrored the volatility and uncertainty of global bond markets.

However, as European inflation remains lower and more stable than the US’s seemingly more persistent 3%, investors sold European bonds proportionally less than American treasuries during early 2024. This is because of the imminent prospect of rate cuts by the European central banks more likely to occur prior to FED rate cuts, amidst the backdrop of a softer inflation environment and slowing European economic growth Consequently, benchmark 10-year German yields in the earlier parts of the year when rates were rising rose only 0.3% to 2.675%, compared to a 0.5% rise in US yields. This led to a rise in borrowing cost gap between both markets to over 2 percentage points in May, the highest level since November 2023

Looking forward, the outlook for inevitable rate cutsat the end of the year has led to the belief that Euro bond yields will trend downwards similar to US treasuries Consequently leading to expectations that the benchmark yield spread between 10-year German bonds and US treasuries will converge below a difference of 2 percentage points. This trend was already evident with the 1.4 basis points dip in German 10-year yields in June to 2 46%, matched by a fall in Italian 10-year yields Consequently, yield spread premiums over German bonds increased by 5 5 basis points to 127 1 basis points, with the spread between US Treasuries and German Bunds remaining close to around the 1.7% mark.

ASSET CLASS: ESG PRODUCTS

Heightened demand for ESG financial products in Europe has primarily been driven by the region's strong ESG regulatory environment as opposed to that of the US This could be seen by frameworks such as the EU’s Taxonomy which helps standardise climate-friendly investments. In addition, due to the existence of more prominent public pension funds As a result, European investors have according to Morningstar data seven times as much capital in sustainable fund assets relative to US investors, who have registered 7 consecutive quarters of outflows Part of this is also due to a desire from the European population to care about the environment , as evidenced by the fact that 73% of European pension schemes reporting that climate change was an investment priority as opposed to 53% of US schemes based on the 2023 LSEG survey

However the momentum of ESG investments has started to wane in 2024, with net inflows into ESG ETFs and exchange traded commodities only totaling €44.5bn in the 1st quarter, a slump compared to the previous recording of €47.4bn in the last three month period of 2023 It is worth noting that such a decline is not purely cyclical as research done by the Financial Times report that allocations into ESG ETFs represent in 2024 only 16% of new money flows, down from 65% during EU peaks in 2022 This is especially concerning, when considering the out-performance of growth equities in comparison to value-focused equities in the past year; especially given a majority of ESG-linked equities pertain to the attributes of growth stocks meaning that flows have gone against tailwinds

YEAR AHEAD (2024-25)

Risks originating from outside the EU have increased in recent months amid two ongoing wars in our neighbourhood and mounting geopolitical tensions. Global trade and energy markets appear particularly vulnerable. Moreover, persistence of inflation in the US may further delay rate cuts in the US, but also beyond, resulting in somewhat tighter global financial conditions On the domestic front,Euro area GDP is forecast to grow by ¾ per cent in 2024, 1½ per cent in 2025 and 1½ per cent in 2026 Central Banks may also ease monetary policy and postpone rate cuts until the decline in services inflation firms, which will provide further support for growth in 2025. .Declining inflation is expected to support a recovery in real disposable income growth and household consumption across the region

Fiscal policy across the euro area will, however, drag on growth in 2024 and 2025 as fiscal support to cushion the impact of high energy costs is withdrawn and some member states reduce their deficits to conform with EU fiscal rules. The need to reduce budget deficits and put debt ratios back on a declining path may require some Member States to pursue a more restrictive fiscal stance than currently projected for 2025, weighing on economic growth At the same time, a decline in saving propensity could spur consumption growth, while residential construction investment could recover faster. Risks associated with climate change and the degradation of natural capital increasingly weigh on the EU’s position as the continent experiencing the fastest increase in temperature

Looking ahead to 2024-25, the EU faces a landscape fraught with uncertainties and challenges, both domestic and global. Recent left-wing electoral victories in Europe, notably in France where coalition-building struggles have left governance uncertain, could hinder economic recovery efforts and investment confidence The European Central Bank's ability to navigate these challenges is further complicated by cyber interference threats and rising debt levels, which pose risks of market volatility and investor apprehension.

Geopolitically, tensions such as the Russia-NATO conflict and conflicts in the Middle East loom large, potentially disrupting global trade dynamics and energy markets These external factors could exert indirect pressures on European economies, influencing trade flows and economic stability. Moreover, internal disagreements within the EU, particularly around execution and financing, are exacerbated by upcoming key elections and the appointment of EU Commission leadership, potentially leading to further fragmentation and policy gridlock

The European migration policy remains a contentious issue, impacting both social cohesion and economic policy coherence Meanwhile, the impending US election introduces another layer of uncertainty, particularly concerning potential shifts in transatlantic relations and geopolitical strategies A victory by former President Trump, for instance, could necessitate a reevaluation of EU policies, including its stance on international peace agreements. Domestically, sluggish productivity growth and high labour costs continue to pose challenges to Eurozone economic output, despite Germany's cautious emergence from recession The need to balance fiscal consolidation with growth-supportive measures further complicates economic forecasts, potentially delaying the European Central Bank's planned rate cuts until inflationary pressures stabilise across service sectors.

INTRODUCTION

The outlook for the Middle East reflects a region grappling with volatility exacerbated by ongoing conflicts, disruptions in shipping, and fluctuations in oil production These factors contribute to an uneven recovery across different economies.

Growth projections indicate a cautious optimism, with overall growth expected to strengthen modestly In 2024, growth is projected at 2 7%, improving from 1 9% in 2023, and further accelerating to 4.2% in 2025 as temporary factors recede. Gulf Cooperation Council (GCC) countries are leading this recovery, focusing on diversifying their economies away from hydrocarbons and oil, which supports their economic resilience

Reflecting heightened geopolitical tensions, oil production cuts, and uncertainty surrounding government policy, growth in the Middle East region is declining. Projected at a modest rate of 2.7% in 2024, this marginal increase will i i i l i t i living standards This represents a return to the ecade preceding COVID-19, largely caused by surge in oil prices originating from the Russia-

ed for both oil importers and exporters during to grow at 2 9%, underpinned by higher-thannon-GCC countries However, voluntary n some economies, in line with sustainability resulting in growth rates comparable to the

025 is expected to exhibit an improvement to production cuts Growth in non-oil sectors may ntries look to diversify both economically and nment reforms including Saudi Arabia’s Vision

ic trends are expected to drive significant wth. The population in the region's major cities annually, while employment is anticipated to These rates are among the highest globally,

been measured at 10.7% in 2024, a marginal prior. While these figures appear extreme, they Yemen, where inflation has been measured at or the remaining countries, inflation rates have aging around 2 4% This variance in inflation ttributed to differing economic policies, levels economic pressures. Saudi Arabia, the United examples of such, where substantial financial nomy mitigate global inflationary pressures ntributed to increased uncertainty around the economy experiencing significant economic e than 86%, with its private sector sustaining a AUD in the first two months of the war With eing most affected, a fiscal crisis remains a top Authority Such hostilities may influence energy commodity prices, trade, tourism, and n Middle Eastern economies. Additionally, if the t will create mounting pressure on vulnerable prices and uncertain fiscal budgets

In 2024, inflation in the Middle East was generally lower than in the preceding year. As of January, nine out of fourteen MENA economies experienced a year-on-year decrease in the consumer price index (CPI) In most of these countries, inflation was below 5%, including Bahrain, Iraq, Jordan, Kuwait, Morocco, Oman, Qatar, and Saudi Arabia During 2023, inflation decelerated in Bahrain, Jordan, and Qatar, primarily due to lower commodity prices and tighter monetary policies, while Oman benefited from subsidies on basic food and domestic petroleum. Kuwait and Saudi Arabia contained inflation through tight monetary policies and extensive subsidies on food and energy, reflecting a broader trend towards easing inflation in the region

GCC Countries

Inflation being lower in countries with currency pegs and currency depreciations has been reflected by the GCC countries, as they have maintained a tight monetary policy stance due to their currency pegs to the US dollar As a result, these countries have been influenced by the US Federal Reserve's policies

Saudi Arabia: The benchmark interest rate is 6%, having remained stable in recent months Despite tight monetary policy, inflation has been contained through extensive subsidies on food and energy

United Arab Emirates: The interest rate stands at 5.40%, as lower commodity prices ease inflation pressures and ensure an alignment with US monetary policy.

Kuwait: With a current interest rate of 4 25%, Kuwait has managed to keep inflation relatively low, helped by its currency peg and subsidies

Oman: The interest rate is 6%, and inflation has been moderated through subsidies on basic necessities.

Qatar: The benchmark rate is at 6 25% Qatar has similarly benefited from tight monetary policies and subsidies

Bahrain: The interest rate is also 6.25%, reflecting the general trend in the GCC region of maintaining tight monetary policies to control inflation

Other Countries:

Although easing, Algeria remains elevated at 6 4 percent, keeping a relatively accommodative monetary policy due to food shortages and high inflation. Tunisia has also continued to struggle with inflation with 7.8 percent, primarily driven by prices of higher fresh produce These food factors undoubtedly cause harm towards the more vulnerable the most as food accounts for a significant part of the spending of lower income households Egypt has grappled with significant shortage of foreign excha over 31% by January 2024 but has since begun to de bank opted to lower intere during its May meeting, amidst uncertainties in c from geopolitical tensions growth slowed to 2.3% in Q of 2023/2024, inflationary headline and core inflation and 31.8% in April 2024. Wh expectations point towar factors such as increase inflows and a more f environment.

Even worse, more rising te exacerbated the econom conflict-affected countries and Palestine These regio monetary difficulties and Consumer prices in the We since October, with infla January 2024, more than t 2023 which stood at 5.0 p 4 5% rate in July for the f early inflation expectations the target range and forec 3 5% in early 2025 due to before moderating Meanw decision, the shekel has d US dollar Additionally, the its macroeconomic forec continue until late 2024 projections have been low for 2025, cumulatively 1 3 previous forecast

The easing of global inflation can be partly attributed to the tight monetary policies adopted by many advanced economies, which have shown signs of winding down. However, real interest rates are still expected to remain higher than pre-pandemic levels as inflation continues its gradual decline While high interest rates have negatively impacted economic growth, factors such as household and firm savings, a strong willingness to take risks, extended maturities on low-cost debt, and expansionary fiscal policy, particularly in the United States, have mitigated these effects Nevertheless, the situation remains precarious for emerging market and developing economies (EMDEs) with high debt, as they must cope with higher real interest rates and financing costs

High debt-to-GDP ratios can lead to significant economic consequences When governments borrow heavily, they may crowd out private sector investment because rising interest rates increase the cost of capital for private businesses Moreover, high levels of debt often result in costly interest payments that gradually limit governments' ability to invest in growthenhancing public projects Additionally, the effectiveness of additional fiscal spending on GDP the fiscal multiplier is diminished when public debt is high Inflation, while potentially beneficial for reducing debt, has not improved the debt situation for MENA oil importers due to currency depreciations that increase the burden of debt denominated in foreign currencies.

There is no free lunch when it comes to reducing debt Ideas of growing or inflating out of debt have been proposed optimistically, but for oil importers in the region, this remains merely a facade

Investors in the Middle East are increasingly diversifying their portfolios beyond traditional real estate investments, exploring alternative asset classes such as private equity Larger companies have traditionally been the primary recipients of capital, but there is a growing interest in smaller businesses and private equity firms focused on growth capital This shift indicates a more diversified approach, with investors balancing between equity value and growth investment styles. Growth sectors, in particular, have a positive outlook due to strong corporate fundamentals, with small and mid-sized companies expected to potentially outperform their larger counterparts by the end of the year

The Middle East, particularly Saudi Arabia and the UAE, is undergoing a significant transformation aimed at reducing reliance on hydrocarbons. Saudi Arabia's Vision 2030 is a comprehensive plan to diversify the economy and promote private sector growth. Key projects include NEOM, a futuristic city, and the Red Sea Project, which focuses on tourism and renewable energy These initiatives are supported by strategic reforms, such as streamlining bureaucratic processes, improving business transparency, and introducing new foreign investment laws. These efforts are designed to create a more conducive environment for foreign investment, contributing to sustainable long-term growth.

As the region opens up, there are numerous untapped investment opportunities The transformation has made the Middle East a focal point for global investors, especially as other emerging markets like China face challenges. Saudi Arabia's inclusion in the MSCI Emerging Markets Index in 2019 and its growing weight in the index highlight its rising significance Similarly, the UAE's strategic location and investment in infrastructure and technology make it an attractive destination for multinational companies However, investors should be mindful of ESG considerations and the region's efforts to address human rights issues, which remain critical to sustainable investment. 75

FIXED INCOME

“This year has seen an uptick in the issuing of fixed income debt products by governments within the middle east This trend has been led by Saudi Arabia which beat out China to become the largest issuer of international debt of any emerging market after issuing $17bn in government bonds since the start of the year Some claim the purpose of this increase in borrowing by the Saudi government and affiliated companies have been to fund its grand megaprojects as part of its Vision 2030 economic diversification plan Most notably of those aforementioned companies is Saudi Aramco, a middle eastern oil giant. Saudi Aramco began selling US dollar-denominated bonds in July as a part of its Global Medium Term Note program, targeting institutional investors with its 10, 30 and 40 year maturity offerings. They have reportedly sold $6bn in bonds after receiving more than $31bn in orders

Similarly, the United Arab Emirates saw an increase in their issuing of bonds with their first sale of Eurobonds as a federal entity since September The UAE offered a 10-year dollar-denominated bond, raising $1 5bn Similarly, the UAE’s capital, Abu Dhabi, sold $5bn USD of 10-year bonds initially priced with a 5.04% yield in April

OIL COMMODITIES

Recent volatile oil prices can be attributed to geopolitical tensions in regions involved in supplying the valuable commodity In particular, Russia’s invasion of Ukraine and tensions arising from the Gaza conflict have resulted in supply side risk which has driven up global oil prices. This occurs due to these region’s stability directly influencing the supply and transportation of oil Such tensions have resulted in a geopolitical risk premium factored into oil prices with Crude Oil WTI futures fluctuating between approximately $70 and $90 USD since its first initial spike in 2022

OPEC+ is an organisation made up 22 predominantly middle eastern member countries who together produce more than half of the total petroleum traded internationally. Its purpose remains to manage oil production through setting production targets for its members, wielding a significant influence over the global oil market and economy In a statement, OPEC+ announced its decision to extend production cuts into 2025. However, while such a decision would seemingly reduce supply, the organisation also left room for 8 of its members to gradually unwind voluntary cuts from October. Concerns surrounding several of these members making this decision and hence leading to potentially higher oil supplies later in the year contributed to global oil prices falling 11% since the early April high.

YEAR AHEAD (2024-2025)

The Middle East faces a highly uncertain journey for 2024-25, influenced by geopolitical tensions and economic factors. Central to this uncertainty is the Israel-Palestine conflict, posing significant downside risks due to its potential for escalation or prolonged conflict Economic activity in Gaza has nearly halted, causing real GDP in the West Bank and Gaza to contract by over 6% in 2023, with 75% of Gaza's population internally displaced. Regional stability has been disrupted as economic activities and trade routes such as the Suez Canal, through which 12-15% of global trade passes, are being disrupted The resulting security concerns in the Red Sea also raise significant global trade implications, with Egypt's economy notably impacted by reduced revenues and cargo trade volumes dropping significantly since November 2023. Such disruptions could severely impact Egypt's economy, heavily reliant on canal revenues, leading to substantial human, social, and economic costs, including persistent output losses and regional spillovers affecting neighbouring countries Economies such as Jordan, Saudi Arabia, and Tunisia have also experienced reduced port activity and slower economic growth due to changes in trade patterns

The oil market remains tense, with potential broader conflicts threatening supply chains. Iran's recent attacks and its president’s death add to the instability, heightening tensions between Israel and the West Despite these challenges, there are signs of thawed relations among Gulf states as they reduce their oil dependence and push for economic diversification, potentially providing some regional stability. Peace talks between Turkey and Syria offer a glimmer of hope.

However, downside risks such as potential OPEC extensions, oil output cuts, persistent inflation, financial stress, and geopolitical fragmentation pose ongoing threats. High-debt countries face increased borrowing costs, leading to potential financial instability. Global economic conditions also play a critical role. This is clear as China's weaker growth could reduce demand for oil exports, while stronger-than-expected growth in the U S could boost global demand, benefiting the Middle East Climate change remains a longterm risk, exacerbating the region's vulnerabilities.

US intervention could influence the conflict's trajectory, with possible spillovers into the global economy Upside risks include currency devaluations and food price spikes, varying inflation rates across MENA countries, with lower rates in the Gulf, Israel, and Jordan, and higher rates in Egypt, Lebanon, Iran, and Yemen. Despite the balance of risks remaining tilted to the downside, there still remain opportunities for the Middle East’s stable growth if tensions ease and economic diversification efforts succeed

1

INTRODUCTION

Lingering effects of high inflation and interest rates have most notably affected national budgets in Africa, a developing economy prone to global economic instability. Africa’s utilisation of lower interest rates during the 2010’s have increased debt to 57% of GDP in 2024, which has declined from 61% in 2023. However, with 40% of total debt borrowed from international markets and cripplingly low amounts of recent international bond market funding, African countries have been unable to roll over their debt ie. finance their current borrowings as a result of high interest rates Debt has further grown faster than the African economy, resulting in a ‘crowding out’ effect where debt-servicing costs expends a larger share of the Budget than that of social and community development.

Consequently, Ethiopia, Ghana and Zambia have defaulted and the WB has estimated another 15 countries are at risk However, with 10-year bonds reaching maturity, Africa has returned to the Euro and sovereign bond market to fund these as interest rates begin slowly declining amid speculation for Fed rate cuts.

Africa has further experienced declining prices of commodities which dominate exports, as US crude oil production surged in January and slow growth in the Chinese economy of 5 2% in 2023 Frequent natural disasters, as well as dry spells in the MarchOctober farming season exacerbated by El Nino further exterminated maize crop production in countries such as Zimbabwe, Africa’s prominent agricultural sector. Plummeting crop yields has aggravated panic and political disrest Further, frequent military coups and the Sudan war has affected investor sentiment Corruption is also a perennial issue, with an estimated US$200 billion loss in illicit financial flows and corruption.

Africa’s public debt has improved due to fiscal consolidation in several Sub-Saharan African countries such as Ghana, Kenya and Nigeria This was eased by heavy funding of $102 59 million by the African Development Bank Group to support Ghana government’s Fiscal Consolidation and Economic Recovery Program in 2023 It is also expected to improve fiscal consolidation measures in West Africa and increase resource mobilisation. Hence Africa’s median fiscal deficit is projected to drop from 3.8% of GDP in 2023 to 3 5% of GDP in 2024 However with fiscal measures aimed at narrowing the budget deficit, macroeconomic headwinds plague governance as high inflation and borrowing costs are detrimental to closing this gap and further slow economic growth.

MACROECONOMIC OUTLOOK

GDP is set to improve as growth is expected to average 3 8% in 2024, 60 basis points above the global average as speculated by the African Development Bank Group. This is fronted by East Africa, where 1.5% annual growth inflated to 4.9% between 2023-24 despite floods and war in Sudan As a developing economy, the Economist suggests that 12 of the 20 fastest developing countries in 2024 are located in Africa With fiscal deficits improving, faster-than-expected recovery from the pandemic and debt restructuring, this statistic should still be approached with cautious optimism as geopolitical tensions, regional terrorism such as disruption of the Al-Mandab strait trade route; and climate change disrupt economic progress According to the IMF, most African countries (excluding North) could experience a decline of 4% in GDP due to geopolitical tensions and negative investor sentiment amassing a loss of $10 billion in FDI. Further, China’s focus on more stable growth has lessened African exports of crude oil. This is coupled with lessening investment and loans from China into the African economy; new loan commitments in 2022 were only $995.5 million compared to $28.5 billion in 2016 and can potentially impair Africa’s future growth in areas such as infrastructure

Inflation has cooled from 7 1% in 2023 to a projected 5 1% in 2024 While this statistic is still above target due to lingering effects of Covid-19 and the Russian invasion on Ukraine, its relative decrease can be attributed to normalisation of global supply chains, declines in commodity prices and tightening monetary and fiscal policy in 2024

Africa has an unemployment rate hovering around 7%, however across the continent there is a large disparity in this figure Niger reportedly has an unemployment rate of 0 5%, which may not necessarily be accurate due to the current military coup and corruption occurring in that region. This is juxtaposed by South Africa’s unemployment rate of 32.9% in the first quarter of 2024 due to high youth unemployment and a lack of available jobs

MONETARY P

Africa's current monetary policy shaped by efforts to address pers and stabilise economies amid significant and internal challenges. Growth Africa is projected to rebound following a slowdown to 2.5% fragility, conflict, and global economic Inflation remains a critical issue, African countries experiencing inflation rates. Policymakers are tightening monetary policies to and stabilise economies.

The Central Bank of Nigeria aggressively tightening its monetary combat persistent inflation. The Rate (MPR) was increased to 26.25% marking the third consecutive rate This is part of the CBN's broader stabilise the economy, which has rates soar to 33.69% in April inflation hitting 40.53%. The CBN on ensuring a stable exchange addressing the structural issues economy, such as transportatio infrastructure constraints

ASSET CLASSES EQUITIES

Africa's equities market has shown remarkable performance in 2024, with several stock exchanges leading global markets in returns. The VanEck Africa ETF (AFK) is up 16 6% year-to-date, outperforming other global regions This impressive growth is underpinned by robust performances in key sectors and strong investor confidence across the continent

The overall equities market in Africa has seen substantial gains, with notable performances in South Africa, Nigeria, and Kenya. As of mid-2024, the Johannesburg Stock Exchange (JSE) has experienced a 5 17% year-to-date increase in the FTSE/JSE All Share Index, which closed at 80,797 38 in July 2024 The Nigerian Exchange (NGX) All Share Index surged by 33 77% YTD, closing at 100,022.03 in early July 2024. Meanwhile, the Nairobi Securities Exchange (NSE) All Share Index increased by 18.36% YTD, reflecting positive investor sentiment and a stable economic outlook

South Africa: South Africa's JSE has seen substantial growth, with the FTSE/JSE All Share Index up by 5 17% YTD, closing at 80,797 38 as of July 2024. The Materials sector has driven this growth, reflecting a 6.80% increase over the last month The JSE's market capitalization has been robust, totaling approximately R6 0 trillion in recent months despite some volatility

Nigeria: Nigeria's equities market has performed strongly, with the NGX All Share Index up 33 77% YTD This surge is attributed to a bullish market sentiment driven by strong corporate earnings and improved investor confidence The NGX All Share Index closed at 100,022 03 in early July 2024, marking a significant milestone for the market.

Kenya: The NSE has shown resilience amid economic challenges The NSE All Share Index has increased by 18 36% YTD, reflecting positive investor sentiment and a stable economic outlook. This growth is indicative of the market's ability to attract and retain investor interest despite broader economic pressures

While African equities have performed well in 2024, challenges such as political instability, currency fluctuations, and economic uncertainties remain However, the overall outlook is positive, with continued growth expected across various sectors Strong economic fundamentals, coupled with investor confidence, are likely to drive further gains in the equities market. Efforts to stabilise currencies and manage political risks will be crucial in maintaining this growth trajectory

FIXED INCOME

Africa's fixed income market in 2024 is characterised by a mix of cautious optimism and strategic positioning amid evolving economic conditions The landscape is influenced by various macroeconomic factors, including inflation control, currency stability, and debt management efforts by different African nations. Despite these challenges, the market shows signs of resilience and growth potential

The overall fixed income market in Africa has seen varied performance across different countries As of mid-2024, yields on government securities have generally increased due to tightened monetary policies aimed at controlling inflation. Trading volumes on major exchanges such as the Johannesburg Stock Exchange (JSE) have remained robust, reflecting strong investor interest in African bonds Additionally, efforts to stabilise local currencies have shown mixed results, impacting investor confidence and foreign investment flows

Ghana: Ghana has witnessed a notable reduction in banks' holdings of Bank of Ghana (BOG) bills, decreasing by GHS 10 7 billion (-32 6%) following a hike in the Cash Reserve Ratio (CRR) Despite this, demand for Treasury bills remains strong, with an average weekly bid of GHS 4 0 billion The yields on these securities have shown mixed movements due to inflationary pressures and the CRR hike. The Ghanaian Cedi has experienced stability, attributed to a combination of monetary policies and external financial inflows

Kenya: Kenya's fixed income market faced reduced investor demand for Treasury bills in late 2023, a result of increased liquidity constraints following a 200 basis point hike in the Central Bank Rate (CBR) to 125% This hike has led to higher yields across the front to mid sections of the yield curve Despite the CBR hike, the Kenyan Shilling has depreciated, influenced by concerns over near-term debt maturities and external debt repayment plans

South Africa: South Africa's bond market continues to attract investors due to its relatively high yields and strong market infrastructure The Johannesburg Stock Exchange (JSE) has seen robust trading volumes, and government bonds remain a significant part of fixed income portfolios The South African government has managed to keep yields attractive despite fiscal challenges and external economic pressures, maintaining investor interest in its securities.

The broader African fixed income market is influenced by several factors Many African central banks have adopted tight monetary policies to control inflation, resulting in higher yields on government securities Efforts to stabilise local currencies have been a priority, with mixed results across different countries. Stable currencies are crucial for attracting foreign investments in fixed income assets Additionally, several African nations are actively managing their debt portfolios through restructuring and issuance of new debt to maintain fiscal stability The combined impact of these measures has shaped a complex but rewarding landscape for fixed income investors in Africa

2024 ELECTION

The South African general election was held on the 29th of May 2024 to determine a new National Assembly Out of the 400 seats in the National Assembly, 201 are required for a majority The African National Congress (ANC) lost its majority for the first time in 30 years since the end of the apartheid in 1994; ANC lost 71 seats and only wrested 159 While many see this as surprising, ANC’s governance has been heavily scrutinised Incessant issues such as food scarcity, decadeshigh violent crime rates, corruption, stubbornlyhigh unemployment at 33% and stagnant GDP per capita have reflected negative sentiment against the party as vote percentages dropped from highs of 70% in 2004 to 58% in 2019

A final vote percentage of 40.18% required ANC’s incumbent leader Cyril Ramaphosa to form a coalition with one of the three opposition parties (DA, MKP, EFF) to form a government Centrist Democratic Alliance (DA) was second to ANC with 21.81% and has chronically been their opposition. This did not fuel favourable expectations for a joint coalition Previous ANC president Zuma’s leftistpopulist MK Party notably came in third, and notably refused to negotiate with the ANC unless Ramaphosa was expelled as president which was not honoured by ANC.

Ultimately, ANC formed a government of national unity (GNU), and extended the invite to all parties to join. Participating parties amounted to 9 and included in particular the opposition party DA and the Inkatha Freedom Party; Ramaphosa spearheaded once again as President Ramaphosa’s Parliament Addressal in July unveiled the GNU’s new shared vision to “place inclusive economic growth at the centre of [GNU’s] work”, noting the fast-growing pace of growth within several African countries He further prioritised redistribution of wealth and opportunity, job creation and affirming the position of the youth and women within the economy.

YEAR AHEAD: 2024-25

The year 2024 is set to be a transformative period for Africa, marked by a series of significant elections across the continent Approximately 20 African nations are scheduled to hold presidential or national elections, representing over 37% of the continent's countries engaging in democratic processes. Notable elections include those in South Africa, Ghana, Rwanda, Chad, Algeria, Mozambique, Mauritius, Botswana, and Namibia, among others South Africa’s Johannesburg Stock Exchange (JSE) has priced in some of this anticipation, with the FTSE/JSE All Share Index up by 5.17% YTD, highlighting the economic optimism surrounding the election season

Yet the elections also pose significant risks Political instability remains a concern, as seen in the Comoros, where election-related protests led to violence and unrest following disputed results. The geopolitical landscape is further complicated by ongoing conflicts, economic challenges like high inflation and unemployment, and the resurgence of military coups, particularly in West Africa The recent coups in Burkina Faso and Mali highlight the fragility of political systems in some regions. Geopolitical factors such as regional conflicts and international relations also play a crucial role. The election in Tunisia, for instance, will occur against a backdrop of significant constitutional changes and a shrinking civic space, posing questions about the future of democracy in the region Similarly, the elections in countries like Ethiopia, South Africa and Somalia are critical for consolidating political stability following recent peace agreements and ongoing internal conflicts

The broader economic outlook for Africa remains cautiously optimistic. Tight monetary policies adopted by several African central banks to control inflation have resulted in higher yields on government securities, attracting foreign investments in fixed income assets Efforts to stabilise local currencies have seen mixed results, but stable currencies are crucial for maintaining investor confidence and economic stability.

Ultimately, the year 2024 presents both opportunities and challenges for Africa The elections provide a pathway to improved governance and political stability, but also come with risks of increased tensions and conflicts Effective election monitoring and peacekeeping efforts by regional bodies like the African Union and respective Regional Economic Communities will be essential in navigating these challenges and ensuring that the elections contribute positively to Africa's political and economic trajectory