In uncertain times, small changes can have huge consequences. Nevertheless, markets are currently upbeat. Investors with resources and strong nerves can continue to exploit opportunities – those without should reconsider the risks.
In economics, researchers and analysts are constantly on the lookout for tipping points. Whether the pandemic will eventually be viewed as a historical tipping point remains to be seen. What is clear, however, is that in the four years since the outbreak of Covid-19, financial markets have witnessed sharp downturns and strong upswings in quick succession. The year 2022, in particular, went down in history as one of the worst financial years in over a century. However, those who kept their nerve through the turbulence were rewarded in 2023, especially since stock markets in most industrialised countries made significant gains.
However, the fundamental question arises as to whether we really live in such a “new world” after all. UBS rightly points out in its report, Year Ahead 2024: A new world, that over the last 120 years, humanity has experienced two world wars, nine pandemics, hundreds of civil wars and regional conflicts, over 2,000 nuclear detonations, several revolutions in the world’s largest countries, at least a dozen cases of hyperinflation, over 15 bear markets, more than 20 recessions, and almost 200 sovereign defaults or debt crises. Against this backdrop, the remarkable adaptability of people and businesses, especially in the years since the pandemic, is astonishing and provides grounds for hope, despite justified despair over wars and poverty.
Investors, too, can remain optimistic over the long term, notwithstanding the need for caution. According to a 2023 Credit Suisse study, equities in Switzerland have yielded a real annual return (after inflation) of 4.5 per cent in local currency since 1900 (USA: 6.4 per cent), bonds 2.0 per cent (USA: 1.7 per cent), and cash 0.7 per cent (USA: 0.4 per cent). Clearly, there have also been phases of major losses in various asset classes, and wealth in some parts of the world has been existentially threatened or actually lost. Nevertheless, the principle persists: those who wish to preserve and grow wealth must be invested – even in volatile times.
In financial markets, the added dimension of psychology, marked by rapid shifts between fear and greed, further complicates matters. It is not for nothing that observers often point out that markets are more often trading expectations about the future rather than the hard facts of the present.
These expectations have been significantly influenced in the past year and beyond by two key factors. First is the innovation surge in the field of artificial intelligence that has given wing to the imagination of a few major companies. Performance on the US and, consequently, global stock markets has been largely driven by seven big technology firms: Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia – almost all active in the field of artificial intelligence.
These companies are now referred to as the “Magnificent Seven” due to their overriding influence. The rapid ascent is evident in the fact that the market capitalisation of these seven firms is equal to that of all companies in the MSCI United Kingdom, Switzerland, and Europe combined – ten years ago, the ratio was slightly over one to ten. The question now arises as to whether this dominance will persist or even increase. What is certain is that most of these companies are not excessively valued and, moreover, are profitable, unlike during the last major technology bubble in the early 2000s.
The second significant factor influencing financial market development continues to be the monetary policy of the US Federal Reserve (Fed). A turning point in interest rate policy occurred in March 2022, first in the USA, later with other key central banks. This, referred to in jargon as the “Fed Pivot”, was the main trigger for the market downturn in 2022. Expectations of an end to interest rate hikes then contributed to a recovery in early 2023. And as of late, markets are now hoping for a “Pivot 2024”, this time in the direction of interest rate cuts. This has once again given a boost to the markets and lifted spirits.
The Economist, on the other hand, recently highlighted the importance of the upcoming elections in the USA – noting that no annual outlook since its first appearance almost 40 years ago has been so dominated by a single individual. Consequently, a re-election of Donald Trump as president is depicted as the greatest danger to the world in 2024. Indeed, if the elections lead to an attack on US institutions, the world’s current precarious balance could decisively topple.
Perhaps the past few years have been a good lesson for the future: those who do not have the nerve or means to withstand major downturns should reduce their equity allocations and other risk positions. While the worst may be over for bonds and liquidity, it should be clear that negative inflation and interest rates could still generate painful losses. On the other hand, those with nerves and resources should advisedly embrace risks (and thus opportunities). Experience shows that this usually pays off. And it teaches us that in times of great change and tipping points, things often turn out differently than expected. For 2024, this could possibly mean: better than feared.
