The rise of AI
China slowdown
Geopolitical tensions
Energy
Falling interest rates
Government bonds
US election
Rising unemployment
Government debt
Austerity
Many years ago, I remember reading that as you progress through life you first acquire information, then knowledge, and ultimately wisdom. So, it occurred to me at the time, some 25 years ago, that as the internet started to really change the world and usher in the “Information Age”, technology would eventually lead to the “Knowledge Age” and one day hopefully a “Wisdom Age”.
With the breakthroughs in artificial intelligence in the past two years, I genuinely believe we have now entered this second great phase, the “Knowledge Age”. Advancements in technology continue to grow exponentially with none more exciting and impactful than AI, which is still in its infancy. This year will see AI become more mainstream and integrated into our lives than ever.
With regard to AI investment, opportunities remain endless as every company in the world rushes to implement the technology into their business in every way they can. This is a multi-decade opportunity just as the internet was before it. This is not just about the mega tech companies, it’s about every company. The changes ahead will be genuinely transformational for the human race.
Beyond China’s challenges in the property and debt markets, their economy is still coming to grips with western nations reducing their reliance on Chinese supply chains. It is China where I suspect the first economic domino to drop. A more severe economic slowdown or crisis in China is certainly a potential catalyst for triggering a range of other domino effects across the world. The prospect of an ongoing slowdown in China will make conditions especially difficult here in Australia.
With every new international conflict, the USA becomes more distracted, and their resources, power, allies, and control are diluted. Before those more idealistic and critical of the USA military become too excited about a weakened USA, for all their flaws, the USA, and its military might remain necessary for global stability. Their enemies though, already realise this and are more emboldened than ever knowing that they can get away with more than they usually would. The risk of escalation is high as spot fires of war spring up around the world. The prospect of conflict becoming bigger or entrenched globally is real. There are significant economic impacts here from inflation to global trade.
Energy remains a high-conviction long-term investment theme despite the prospect of a slower economy. The move to clean energy is slow and expensive while there has been a chronic underinvestment in traditional energy, such as oil and gas, across the world. This dynamic combined with the potential for supply disruption due to geopolitical tensions across the Middle East and Europe may well see a higher oil and gas prices in 2024 and beyond.
I think this year we will see interest rates stay too high for too long and with that a global recession will see unemployment rise sharply before interest rates are reduced. There remains a chance of the ‘Goldilocks’ scenario unfolding if central banks can orchestrate the perfect balance, but I have just never believed that to be a realistic scenario to use as a base case. Human nature and by extension that of our economy and society more broadly is one of extremes, not balance. It’s why we get booms and busts.
The opportunity in government bonds is uniquely exciting given it’s the world’s safest and usually most boring asset. After a couple of very poor years where we almost completely avoided this asset class, bonds are back in 2024. You can pick up a 4-5% income yield these days and with the prospect of interest rates starting to fall later in the year, bonds are poised to deliver solid returns in 2024. Bonds could easily achieve a 10%+ total return with very limited downside risk.
Elections don’t usually move investment markets significantly. However, the US presidential election is set to be different. Perhaps the most polarising figure in the world this century is Donald Trump. I’ve been saying for a while that by the end of 2024 Trump will either be in jail, dead or president of the USA again. I don’t know which, but I will not be surprised by any outcome. If he wins back the presidency, which I think is very possible, the world is in for a shock as he is likely to be far more ruthless and bold this time around.
The US government debt is now $34 Trillion and growing fast. Expect Government Debt to be an election topic in the US and other countries where debt is at record highs. There will come a time whereby the people will have had enough and smart politicians will campaign on that basis. The first steps will be to balance budgets and that will require increasing taxes and cutting spending. Austerity is likely to re-enter the political, economic and consumer conversation for the first time in a long time.
The world sits as a virtual tinder box awaiting a match to set it alight in a way that has not been seen in my lifetime. I know we’ve seen 9/11, the GFC, and the Gulf wars, but the set of circumstances the world now faces are potentially more concerning than at any of those times. I say potentially, and that is key, things may not play out that way, but from an investment perspective prepare for the worst and hope for the best.
Regardless of the situation I am extremely optimistic about the future for both investment markets and the world. There will always be set back and conflict but time after time people rise up and continue to succeed. Maybe in the decades ahead we can look forward to a transition to a more peaceful Wisdom Age but for now there is much to be excited about as we enter the Knowledge Age.
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.