Brace for a volatile ride in the Year of the Dragon

IN THE lunar calendar, 2024 is the Year of the Dragon, which is considered the most auspicious animal in the Chinese zodiac. In Chinese astrology, the Cycle of the Five Elements plays a significant role in determining the energy and potential outcomes of each year.

In 2024, the element associated with the year is wood. Hence, 2024 is the Year of the Wood Dragon.

The Dragon is the most formidable animal in the Chinese zodiac and is associated with power, strength and good fortune. The element of wood brings growth, creativity and endurance. Combined, “Wood Dragon” years usually burn with lots of energy, vibrancy and dynamism, and are usually associated with major historical and political events.

For instance, the US Civil Rights Act was signed into law in 1964 by president Lyndon Johnson. It ended racial segregation in public places and banned employment discrimination on the basis of race, colour, religion, sex or national origin.

Mao Zedong died in 1976, ending the Cultural Revolution in which millions of people were killed. Two years later, the Deng Xiaoping-led reforms reduced China’s poverty rate from almost 80 per cent in 1976 to its current status in which hardly anyone suffers from malnutrition and hunger.

Politically charged year

The Year of the Wood Dragon in 2024 will likely be a politically charged one. Over the next 15 months, the world will experience presidential and parliamentary elections representing 63 per cent of global gross domestic product. The most impactful elections for geopolitics globally will be in the US, Russia, India, South Korea, Indonesia and the UK (no later than January 2025).

Dragons are known for their ambition and desire for success. Combined with a combustible element such as wood, we might be in for an unforgettable and volatile ride this lunar year. As a result, there may be increased competition among nations this year, with geopolitical tensions already at uncomfortably high temperatures, and affecting trade and financial flows as well as asset prices.

The increasing fault lines between two major blocs – the Global South versus the West – will have major implications for the macro and investment outlook of both developed and emerging economies. Greater geopolitical uncertainty and the inevitable higher policy uncertainty will accelerate the pace of supply chain diversification, with efficiency usually sacrificed.

The US elections will likely be the most consequential geopolitical event this year. Deep polarisation, rising populism and nationalism have raised the level of uncertainty even higher. It is too early to know for sure whether Donald Trump will be the next US president, what his policies are, and the resulting impact on the economy and capital markets.

It would be naive to simply regard the 2016-2017 US elections as a suitable template for how markets will likely behave should Trump win. It is not so straightforward. The US and global economy are in a much later cycle, with growth likely slower than in preceding years.

Current US fiscal spending levels of around US$1.7 trillion leave the US treasury markets with much less room to manoeuvre. If Trump were to extend the tax cuts, that would add another US$350 billion to the fiscal bill after 2023. If that is the case, a rise in US treasury term premia similar to what markets experienced in the summer of 2023 would immediately erode any investor optimism.

Furthermore, corporate earnings expectations are much higher, and market expectations on both the magnitude and timing of potential Federal Reserve rate cuts are unrealistic at the moment. Although stock market returns in the Year of the Dragon were generally positive, Dragon years have also experienced some of the worst returns, for example in 2000 when the Nasdaq crashed.

Bonds and equities

Nonetheless, 2024 should be a positive year for both bonds and equities. With global growth likely to be slower this year, weaker growth should contribute to lower interest rate expectations. Market expectations that the Fed will not cut rates below 4 per cent within the next five years are overly hawkish, although expectations of rate cuts back to the zero-lower-bound are similarly unrealistic.

We think this is an opportune time to add to high-quality bonds – specifically high-grade government and investment-grade bonds, ideally with a five-year duration.

The element of wood is associated with growth and expansion. Combined with interest rates falling from multi-decade highs, this upcoming Year of the Wood Dragon should be positive for cyclical and growth sectors such as technology and property, which are interest-rate-sensitive sectors. US technology companies should be among the key beneficiaries of artificial intelligence-related demand for both hardware and software. Singapore real estate investment trusts with high-quality assets could also potentially be beneficiaries.

With two major wars raging and the political calendar filled to the brim, the Year of the Wood Dragon will likely be a difficult, unpredictable and unforgettable year. But with discipline, focus and resilience in the face of market volatility, investors will likely be rewarded with positive performance when the Year of the Wood Dragon exits.

The writer is the chief investment officer for South Asia-Pacific at UBS Global Wealth Management