How do you invest in the chaos of the world?

The year-end global economic and investment picture is alarming to say the least. First of all, U.S. 10-year bond yields 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 aggressive monetary and fiscal stimulus from the authorities. The war between Israel and Hamas is the most dangerous in decades. What's going on in our world? And how should we invest? Let's find out.

When we look at the rise in bond yields

We see that this is a result of the Federal Reserve signaling that interest rates in the U.S. will remain high for an extended period of time in light of the continued improvement in economic indicators. Inflation risks remain high, especially if the war between Israel and Hamas continues.

The U.S. fiscal deficit

The U.S. fiscal deficit is likely to continue to rise. In August, Fitch estimated the deficit will rise from 3.7 percent of GDP in 2022 to 6.3 percent this year and 6.9 percent in 2025 because government spending is not decreasing enough and taxes are not increasing enough to support that spending.

Federal Reserve

The Federal Reserve continues to reduce liquidity, causing short-term bond yields to rise. The $95 billion a month liquidity cut has reduced the Fed's balance sheet to about $8 trillion, down from $9 trillion in early 2022.

Exploring four recessions since 1990

It is interesting to note that they occurred 4-8 months after bond yields recovered, when there was previously an inverted yield curve (when short-term bond yields are higher than long-term yields). U.S. bond yields are normalizing.

With regard to the Middle East

We believe that Israel intends to remove Hamas from power in the Gaza Strip and establish it as an autonomous territory similar to the West Bank. However, the ground attack has yet to begin and world anxiety is growing due to the high civilian casualty rate of Israeli airstrikes. The peace summit will be the first step in finding an end to this war. But negotiations to agree on a joint meeting of the conflicting parties could take at least one or two months. As long as the war continues, we will see further fluctuations in the economy and investment 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 IMF expects China's GDP deflator to decline this year compared to last year. Combined with a weaker yuan, nominal GDP could contract in dollar terms.

This picture is consistent with the signals the Chinese government has been sending, saying it is willing to help the economy expand as planned. President Xi Jingping 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.

Local Thai stocks

They fell to a three-year low. This is in line with the regional trend, although the fall 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 worries about the Middle East and US interest rates, has investors worried.

Meanwhile, the negatives in Thailand stem from concerns that measures to stimulate the economy through the distribution of digital money may yield less than expected. Accordingly, we recommend the following three strategies:

Dr. Piyasak Manason is a senior director of investment strategies at INVX-Research Group, at InnovestX Securities Co Ltd.