Do not fear new highs – stay invested
Last week, both the S&P 500 and the Nasdaq 100 moved to new all-time highs and new two-year highs. Investors might be concerned about the new record levels. However, more likely than not, the new all-time highs show that there has been a consolidation taking place over the last two years in the secular bull market in equities, which has been led by US growth stocks.
Historically, the S&P 500 has gained another 10.5% and the Nasdaq 100 another 17% in the following 12 months after rising to a new two-year high. Fresh 52-week highs are generally a bullish sign, as the market has a tendency to trend.
Nevertheless, the average S&P 500 stock is still down 5.3% from its 2022 highs. Thus, the market is showing slight signs of breadth divergence. This is probably only a minor issue, and the average stock is likely to join the large caps and attempt to rise to new record highs in the US.
China: Growth challenges continue
Chinese real GDP figures show that growth momentum slowed in the fourth quarter of 2023, in line with expectations. Year-on-year real GDP growth picked up thanks to a low base from the end of 2022, when China was under strict Covid-19 restrictions. In 2023 as a whole, the Chinese economy grew by 5.2%, in line with the government’s growth target of ‘around 5%’. Despite meeting this growth target, last year’s recovery was far from smooth.
For China we expect the deflationary pressures and growth challenges to persist in 2024. The main drag on the economy remains the property downturn, which shows no signs of abating. With economic headwinds persisting, it will be challenging to achieve a similar pace of growth this year as last year. Thus, we expect economic growth to slow to 4.4% in 2024.
While the world's two largest economies currently face different experiences, there is something they and many other countries globally have in common: the economics of plastic recycling.
Circular Economy: The long road to plastic recycling
When it comes to packaging materials plastic is the worst enemy. Since they emit carbon during the production process and pollute the environment if not properly disposed of, plastics are on top of many regulators’ sustainability agenda. Besides outright bans of single-use plastic, another focus is the fostering of plastic recycling. A lot of progress has been made in terms of process in recent years, yet recycling struggles to get off the ground for a very simple reason: the economics are not working out.
During the past few months, the economics have deteriorated again, firstly due to the rapid decline in raw material prices, most notably natural gas, but also crude oil, and secondly due to the expansion of petrochemical production capacities in China and the shale gas boom in the United States.
As a result, plastic recycling remains much more of a promise for the future than a solution for today – at least in terms of the magnitude required. Yet the shift to more sustainable packaging solutions is still happening in parts of the Western world, driven by companies that are striving to meet their net-zero targets and by increasingly conscious consumers. Europe is the clear global leader in terms of the shift in sustainable packaging, as plastics are being substituted with paper, cardboard, glass, and metal, depending on the purpose. All in all, we still see the circular economy as an appealing structural growth story with an improving cyclical backdrop.
What does this mean for investors?
While it is easy to look at headlines and all-time highs, comparing regional trends is by far more revealing. In the past trading days, Chinese equities hit multidecade extremes, such as the Hang Seng Index, which is trading at a 19-year low. At the same time, Japanese equities hit a 34-year high. Given the extremes in market moves, it may be tempting to go against the trend, but they may be hard to time.
We always highlight that new highs are a bullish signal, and this is all the more true for all-time highs. Amidst the dramatic rise and falls, a new economic cycle is upon us and we recommend that investors stay invested, especially in equities, with a preference for US growth stocks.