2024: A tale of two halves?

2024 A tale of two halves

The generally accepted proxy for the global equity market is MSCI ACWI (All Country World Index), which contains 2,760 listed companies [1]. In Dollar terms it has delivered to 28th June a total return of 11.58%. This is an exceptional start to 2024, particularly if one considers that since December 1987 the average annualised return of this index has been 8.31[2]%.

Artificial Intelligence (AI) is a General Purpose Technology

AI is broadly analogous to electricity or the internet in the sense that it may have general applicability to the whole global economy [3]. Very few sensible commentators are denying how truly exciting AI is, especially those that have experimented with it.  Nevertheless, a good idea does not necessarily result in a sound investment. Investors need to be confident that the investment capital they are outlaying is actually likely to generate the profits and cash flows they forecast. Unfortunately, investors as a group do occasionally lose touch with reality and extrapolate rapid growth rates into the future, which later turn out to be too optimistic. We are concerned that this mistake is being repeated today.

Concentrated markets and diversification 

The fates of the MSCI ACWI’s largest constituents are overwhelmingly tied to the potential of AI. In fact, approx. 20% of the index is AI related [4]. Taiwan Semiconductor, Nvidia and Broadcom are responsible for producing the ‘picks and shovels’ whereas Microsoft, Apple, Amazon and Alphabet are, to extend the mining analogy further, doing ‘the digging’. Everyone else is buying what they have extracted.  

In itself there is nothing wrong with this. However, from a portfolio management perspective it leaves a lot to be desired. The huge sums of capital migrating towards the AI theme are leaving other stocks behind and portfolios are in danger of becoming dangerously tied to a single theme with unrealistic expectations. Put differently, diversification is being ignored. 

The global economy is showing signs of weakness 

Against this backdrop, the world’s two most important economies, China and the United States are showing signs of weakness. The CCP is dealing with the aftermath of decades of malinvestment, particularly in residential property and the economic data coming from the US is ambiguous at best. A deceleration in economic activity will be bad news for risk assets such as stocks. 

A note on the UK General Election 

The UK election is now behind us, and Labour have won a landslide victory. Their victory was widely expected, and capital markets had already priced this outcome in. The Tories have been decimated and there has to be serious consideration given to what they can possibly offer voters going forward. Reform UK might reasonably claim to be a credible centre-right alternative.  

The collapse of the SNP must be welcomed as it puts to bed the possibility of a second independence referendum.  Just as the Scottish question appears to have been resolved, a referendum on the unification of Ireland might come into focus. After all Sinn Fein are now the biggest party in Northern Ireland. With any luck this will be an issue for the next parliament.  

After years of outflows from UK equities, a plan to revive UK Plc is a policy which we believe can be supported across the political spectrum. Any initiative in this regard will almost certainly require the participation of the UK pension industry and incentives to encourage domestic investment will have to be thought about carefully.

International investors will also need to be convinced that the UK itself can restore its reputation for political stability. The past decade of constant chaos which includes highlights such as Brexit, several prime ministers, unorthodox economic policies and a referendum of whether the UK should continue to exist at all need to be a thing of the past. 

[1] See https://www.msci.com/documents/10199/8d97d244-4685-4200-a24c-3e2942e3adeb

[2] See above

[3] For more detail on the matter see https://www.forbes.com/sites/joemckendrick/2023/08/08/why-gpt-should-stand-for-general-purpose-technology-for-all/

[4] See note 1 above, based on Whitman calculations

Disclaimer: This communication is issued and approved by Whitman Asset Management Limited (“Whitman”) which is Authorised and Regulated by the Financial Conduct Authority. The value of investments may fall as well as rise and your capital is at risk. The information does not constitute financial advice or recommendation and should not be considered as such. Conduct your own research and seek independent financial advice when required.

Although Whitman uses all reasonable skill and care in compiling this report, no warranty is given as to its accuracy or completeness. The opinions expressed accurately reflect the views of Whitman at the date of this document based on our views at such time regarding market conditions and other factors, may depend upon assumptions or projections that may not prove to be correct, and are subject to change. The opinions stated are honestly held, they are not guarantees and should not be relied upon. 

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