How to invest in a chaotic world?

Looking at the global economic and investment situation in the last quarter of the year, there are serious concerns. First of all, the yield on 10-year U.S. bonds rose to 5%, a level not seen since the global financial crisis 15 years ago. The Chinese economy may look better than expected, but only because of the authorities' active monetary policy. The war between Israel and Hamas is the most dangerous in decades. What's going on in our world? And how should you invest? Let's find out.

Analyzing the rise in bond yields

we see that this is the result of the Federal Reserve signaling that interest rates in the U.S. will remain high due to good economic data. Inflation risks remain high, especially if the war between Israel and Hamas continues.

The U.S. fiscal deficit

is likely to continue to rise. Fitch estimated in August that the deficit will be 3.7% of GDP in 2022, 6.3% this year and 6.9% in 2025 because the government is not cutting enough spending and taxes are not increasing enough to support that spending.

In the meantime, the Federal Reserve

continues to reduce liquidity, which causes short-term bonds to rise. A $95 billion monthly liquidity contraction has reduced the Federal Reserve's balance sheet to about $8 trillion, from $9 trillion in early 2022.

Researching the four recessions since 1990

It is interesting to note that they occurred 4-8 months after bond yields returned to normal after a period marked by an inverted yield curve (when short-term bond yields exceed long-term bond yields). U.S. bond yields are normalizing. The 10-year bond yield is 4.9% -5.0% and the 2-year bond yield is 5.0% -5.1% (the difference between the 2- and 10-year bonds is slightly negative, compared to close to -1% in the past). The U.S.

Although bond yields are not the direct cause of the recession

It reflects a psychological factor - markets and citizens believe that interest rates are too high, that the economy will go into recession, and the central bank will cut rates. When this happens, short-term bonds become in demand. This leads to lower short-term yields, which always happens before an interest rate cut.

With regard to the Middle East

we believe that Israel intends to strip Hamas of its rule over the Gaza Strip and establish it as an autonomous territory similar to the West Bank. But the ground operation has yet to begin, and international concern over the high number of civilian casualties from Israeli airstrikes is growing. A peace conference would be the first step in finding an end to this war. However, negotiations to bring conflicting parties to the table can take at least one or two months. As long as the war continues, we will see further fluctuations in the economy and investor sentiment.

In China

GDP growth of 4.9% in the third quarter was encouraging, but the real estate market remains fragile and deflation risks are intensifying. The International Monetary Fund expects China's GDP deflator to decline this year compared to last year. At the same time, due to the depreciation of the yuan, nominal GDP may shrink in dollar terms.

This is in line with signals from the Chinese government

of a willingness to help the economy expand as planned. President Xi Jinping recently visited the People's Bank of China for the first time in 10 years and the government announced 1 trillion yuan worth of fiscal measures.

China's economy has recovered better than expected.

Thanks to the extensive use of monetary policy, including lowering interest rates and increasing the money supply. This helps in the short run, but could lead to debt problems in the next period, leading to a slowdown in the economy.

Locally, Thai stocks

fell to a three-year low. This is in line with the regional trend, although the decline in Thailand was even more pronounced. In the region, we have seen strong selling pressure on tech stocks as investors worry about the outlook for large tech companies in the US. This, along with concerns about the Middle East and US interest rates, is keeping investors on edge.

Meanwhile, negative factors in Thailand

are linked to concerns that measures to stimulate the economy through digital money distribution may be less effective than expected. We therefore recommend the following three strategies:

Dr. Piyasak Manason is a senior director of the INVX-Research Group Investment Strategy Division at InnovestX Securities Co Ltd.