The advancement in technology continues every year regardless of stock market movements. This year, I’ve selected two specific areas of technology as the leading themes for the year ahead. There is no better example of this than the progress in artificial intelligence with ChatGPT hitting the mainstream in recent months. This is world-changing technology, and every business and consumer will be exploring its capabilities in 2023. It’s not only what the technology can do, but also all the businesses and applications that can be built to utilise the platform.
Improvements in these technologies will accelerate exponentially, ushering in entirely new ways of doing business. Not only will it be creating and eliminating jobs but creating and eliminating entire industries too. The emergence of AI and machine learning will bring about unprecedented efficiency and productivity for countless businesses. I also think the opportunity in robotics and automation is massive too and that it’s only a matter of time before this area has its ChatGPT moment as well. Watch the latest Boston Dynamics robot video and consider what that type of technology means for the future. So many industries benefit here.
The most difficult part of 2023 for investment markets may simply be trying to answer the inflation question. Financial markets currently anticipate a goldilocks situation where no recessions eventuate, inflation returns to 2% and economic growth and corporate earnings will improve. This is essentially the rationale for the recent rally in stock markets globally. I would not be surprised to see inflation stick around the 5-6% mark for some time. That would force the Federal Reserve in the US to hold rates higher for longer and deliver significant pain across the board. A recession being the likely result. Markets are not pricing in such a situation. Inflation is not easily defeated and doing so usually requires significant financial and economic pain.
As much as the Goldilocks scenario has emerged as the consensus in financial markets over the last month or two, I am still very concerned about recession and expect this to be the reality for the global economy. I would urge caution. I believe there is far more downside risk in 2023 than there is upside. Recession risk is still high in Europe, the US and even here in Australia. It just takes time for all these dynamics to flow through. There are landmines everywhere for markets to navigate. None of these are being factored in by the market currently, and while not all of them will eventuate, some will and that poses a big problem.
Geopolitical tensions are near the top of the list for 2023 and the longer the war in Ukraine festers the more likely something escalates or spreads. It is on the side burner at the moment but I expect this to remerge as a bigger problem in 2023. There is no easy way to resolve a conflict when the aggressor is both a nuclear power and under authoritarian control. Russia’s aggression has the potential to spark other conflicts and test the resolve of all nations going forward. Tensions between China and the US have seemingly cooled off, but I suspect more for strategic reasons than due to any real change in the long-term relationship which is one of rivalry and distrust.
It also leads to entirely new trends that impact the investment landscape. The continuous movement towards reshoring of manufacturing and supply chains across the world is critical to national security whilst also having an inflationary effect. Additionally, the energy shortage in Europe highlights the systemic lack of supply globally. While a moderate winter combined with the China covid lockdown helped Europe navigate their energy shortage for now, energy remains both an issue of concern and a significant investment opportunity in 2023.
As lower consumer spending and weaker corporate earnings in the next 6 months lead to cost-cutting and a potential recession, I expect the second half of the 2023 calendar year to see unemployment well on the rise too. Job security will become an issue as job layoffs start to spread. It’s a pending disaster for home builders and construction that will have a massive flow-on effect over the next 1-2 years as all the related trades and businesses feel it. This could end up being hundreds of thousands or even millions of jobs in the US. There are several separate areas like this across the world where economic spot fires are waiting to emerge.
There is an increasing risk of debt crises emerging too. Higher interest rates are now a reality, and the flow-on effects will start being felt in a range of areas. Businesses of all sizes with borrowings due to be refinanced will face a real wake-up call. But the same also applies to Government at all levels. Suddenly the debt they have will begin costing substantially more. I think there are several areas where disaster could strike from Japan trying to control their yield curve through to the US and their debt ceiling issues remerging. Normally these issues resolve themselves and carry on, however, the game has changed for good, and I would not be surprised to see these situations deteriorate.
My final point after outlining a variety of macro themes is this: There will always be great businesses to invest in regardless of the macroeconomic situation. If anything, the last few years have forced investors to consider the macroeconomic circumstances more than ever, but more than is ordinarily necessary. Great businesses will continue to thrive and prosper regardless of the geopolitical environment, inflation, interest rates or the global economic outlook. As long-term investors, it’s critical not to overthink this. It’s easy to get caught up in the timing of short-term fluctuations, and while it definitely matters, the individual investments that you own matter more. Invest in great businesses at reasonable prices for the long term.
Themes:
Continued Rise of Artificial Intelligence and Machine Learning
Robotics and Automation
Inflation and Interest rates
Energy
Geopolitical Tensions - Escalation of the War
National Security
Corporate Earnings
Recession Risk
Risk of a Debt Crisis Emerging
Post Covid - A Return to Normal
General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.