As advisers we often field a range of queries from our valued clients, so we thought to summarise a few of them for your interest that hopefully adds some value.
Post COVID progress
Certainly, progress has been made since covid, such as increased health awareness, pathogen testing and outbreak tracing of viruses. We have seen container shipping costs falling back, global supply chains operating more smoothly, and the water level in the Panama Canal recovering to average levels allowing normal vessel traffic. Employment arrangements have become more flexible, adding to employment participation rates. Working from home has been a popular means to reducing disruption and keeping illness at bay. There has been new investment and safeguarding of people’s personal data and privacy in terms of health and technology in the financial services industry with authenticator apps, SMS messages quickly becoming the norm to facilitate banking and transactions, alongside ID verification to offset increasing cyber-crime and internet fraud. Our community has become more resilient since 2020, and given our awareness of such weakness there is more progress still being made.
New growth – technology and health
Morningstar research recently spent time with Silicon Valley analysts to discuss artificial intelligence (AI) who believe their future capabilities will have a far reaching impact not dissimilar to the year 2000 when Alphabet/Google emerged. Innovation seems to rise exponentially not in a linear way they say. AI should drive demand in cloud providers and semiconductors as investment opportunity for the right price.
Morningstar also see healthcare heading into a ‘golden age’. Following covid and rapid investment has seen pharmaceutical developers producing more vaccines and therapies. For example, solutions for obesity and diabetes are being progressed upon well. Efficiency gains in medical services and personalisation of treatment and data are also advancing health services, leading to better outcomes, living standards and revenue growth.
Information and asymmetry
We are in an era of misinformation and disinformation (Wikipedia 2024), large US companies are delighted to keep pushing their sometimes unhinged array of views for profit purposes, increasing uncertainty, devaluing the benefits of a formal education, or challenging traditional consensus. This can be seen among our younger generation, who are our future. Social media is visible, you or someone you know probably has a Facebook account, but less visible are the drivers behind this dominating theme that seek to exploit social and psychological forces and readers’ emotional needs for easy wins or standing status among peers. Humans strive for acceptance, good information and avoiding danger, it is a part of our DNA. But how we access and apply our daily information, and the sheer volume of it is sure to challenge our abilities, values and our relationships.
As an investor who strives for good information, asymmetry creates an imbalance of power in transactions causing inefficiency, market failure being the worst case. Factor examples include recency bias or adverse selection, moral hazard and monopolies of knowledge.
Asymmetry is a factor than can be used in quantitative analysis and incorporated into good financial advice. Short term data points when applied in isolation can cause volatility. Take the recent market sell off in markets that was one data point. Current and surrounding data points are instead supportive of economic conditions and financial markets, we believe central banks are managing inflation well to date whilst keeping most economies in positive GDP territory. Paid for media will happily tell you otherwise. So taking a long term view and finding more reliable information sources we believe is essential and valuable.
Trump 2.0 Market implications
Trump’s support for a 10% universal tariff on imports would suggest the US returning to isolationism and also lead to a splintering of the US-aligned bloc but some long term trading partners may ultimately be exempted such as Canada and Mexico. Trump may also push to withdraw from the WTO and NATO further impacting GDP growth in his pursuit to restore local industry and manufacturers to boost margins and new investment.
November elections may cause impact in financial markets but we think less not more. From Neil Shearing and Capital Economics, there will likely be a marginal impact on US equities with higher risk free discount rates and slower corporate earnings growth weighing on equities. However, to the end of 2025, markets are likely to move ahead amid technology and AI momentum.
Non-US equity markets like Australia are expected to underperform US markets although remain positive due to new and additional tariff measures and a slowdown in global trade. This will further weigh on China’s economy and markets, and more broadly Asian emerging markets, possibly giving rise to new trading blocs (US and the West; China/Russia/central Asia).
Tariffs are inflationary and subject to time frame. They will put some upwards pressure on bond yields however should end slightly lower in 2025 as inflation is managed. However Trump, like during his first term as president, may try to loosen fiscal policy (less government spending, less tax) to account for upwards inflation readings, although there is not much scope to repeat this. A Trump victory would help support the US dollar and if a trade war developed further demand for the US dollar is likely.
Global Fracturing
There is now broad agreement among economists that the world has reached peak globalisation, although there is little consensus about what comes next. One view is that we are entering a period of deglobalisation, in which global trade volumes decline and cross-border capital flows recede. An alternative view and more likely outcome is that the global economy starts to splinter into competing blocs.
One trading bloc may be US led and the other China led. Neutral India under Modi may fall into both camps given their already strong position and growth prospects. Increasingly though, policy choices within these blocs will be shaped by geopolitical considerations. This process can be thought of as ‘global fracturing’. Whereas the period of globalisation was driven by governments and companies working together, fracturing is now being driven by governments alone.
Key Takeaway
These are some evolving themes occurring and there are more of course, such as our transition to renewable energy and the impact of war on markets. It pays to keep ahead of the game as uncertainty increases and understanding of what is or isn’t relevant. Market cycles can and always will change, some fundamentals do not. Diversification and having appropriate leverage are important. Taking a long-term view and positioning accordingly is key.
For More Information
For assistance or more information, please contact James Cavanough at Lantern Advisory on (07) 3002 2690 or via jamesc@lanternadvisory.com.au.
