The Chinese zodiac comprises 12 periods, each identified by an animal, and each associated with an element – wood, fire, earth, metal and water.

2024 is a Wood Dragon year, with the last one occurring in 1964. When the last Wood Dragon ran from Feb 13, 1964, through to Feb 1, 1965, it was a strong period for stock markets. The Dow Jones Industrial Average and the S&P 500 indexes posted gains of 14 per cent and 13 per cent, respectively.

This offers hope that stock markets could enjoy another strong year in the current Wood Dragon Year.

After all, the dragon is held as an auspicious symbol of strength and power traditionally. It is also associated with good fortune, wisdom and success. However, some also see the dragon as an embodiment of chaos, especially if it is untamed. So, investors may have to brace themselves for greater volatility in the year ahead.

Stock market outlook

We feel that there are reasons to be cautiously optimistic about the investment outlook, but not to be outrightly bullish. A great deal hinges on the outlook for the United States economy and the Federal Reserve’s monetary policy.

It could augur well for investors if the US economy slows down but avoids a hard landing, inflation there cools further and the Fed cuts interest rates progressively over the next three years. Historically, such a backdrop has been positive for risk assets like equities and high-yield bonds in the medium term.

Investment-grade bonds, with a decent yield and a long tenor, will also look more attractive when the Fed reduces rates. This is because rate cuts and a slowing economy usually augur well for long-duration bonds and help them post capital gains.

Gold will also be a beneficiary of lower Fed rates. We are positive on the precious metal because it offers zero yield – it does not pay dividends or regular income to investors – and will look more appealing when rates fall. A weaker US dollar too should also augur well for gold. As gold is priced in the currency, this will make the yellow metal cheaper in greenback terms and spur demand, especially among central banks looking to diversify their foreign exchange reserves away from the US dollar.

Boost for Chinese stock markets?

A key market on investors’ minds is the battered Chinese stock market, where valuations are very low. However, concerns remain about the economy and property sector.

Will the Wood Dragon be able to breathe some fire into Chinese equities and help them to rebound after being in the doldrums for the past three years?

While we have seen sharp rebounds in the Chinese stock market from time to time, many of these rallies have proven to be short-lived.

For Chinese stock markets to see a more sustainable rally, the problems in the property sector need to be addressed more effectively to help boost confidence. A significant part of the Chinese economy and consumer sentiment is tied to the property sector, and it is hard to see a meaningful recovery in the stock market without some stability in the property sector.

The good news for China is that top Communist Party officials are clearly placing emphasis on boosting confidence. They are showing urgency in responding to calls for more aggressive stimulus as the economy grapples with a real estate slump, lingering deflation and shattered confidence that have caused a massive stock market rout.

Chinese President Xi Jinping has also shown signs of becoming more involved in the nation’s financial and economic policies, and this offers hope that China will do more via policy measures in the coming months. This may gradually help to improve sentiment and confidence over time.

Those looking to invest in Chinese stock markets must have a good risk appetite and be prepared to take a long-term view. Most importantly, do not over-invest, and only manage investment exposure to Chinese equities within a diversified portfolio.

Will Trump upset the Dragon?

A significant risk for the US and global equity markets that investors need to be mindful of is the possibility of Donald Trump making a comeback as US president later in 2024, after his strong showing in the Republican races in Iowa and New Hampshire. Some even see this as the biggest risk facing markets in 2024 and possibly even in 2025.

We see Trump 2.0, if it happens, causing a surge in global financial market volatility. His threat to impose a 10 per cent tariff on all imports to the US will be inflationary, stopping Fed rate cuts and hurting the US economy. Trump has also floated the idea of imposing a tariff of more than 60 per cent on Chinese goods.

Any plans by Trump to cut the corporate tax rate and other taxes (as he did during his presidency in 2017) to spur the economy, if unaccompanied by a cutback in government spending, may cause US Treasury yields to spike as the US budget deficit is already very sizeable. When Britain did something similar in 2022, government bond yields surged.

There are also fears that Trump will tinker with the Fed’s independence, pull the US from global alliances like Nato and withdraw support for Ukraine and Taiwan. So, a Trump victory could spook investors, as it could lead to significant policy and political uncertainty.

Of course, even if Trump wins in the US election in November, he may not get all his wishes granted if there is gridlock in Congress – which will help to check any excesses from a sitting president.

Bottom line

Overall, we remain constructive on the global investment outlook in the year ahead, and continue to advocate exposure to a diversified portfolio, especially given uncertainties around the heavy election calendar globally.

Liquidity will be a supporting factor for markets in the Dragon Year. With close to US$6 trillion (S$8 trillion) sitting idle in US money market funds, there is clearly an abundance of liquidity that can provide markets with firepower in 2024.

• The writer is the managing director for investment strategies at OCBC