News & Insight • Market Insights
15 January 2025 | Simon King
A View from The Bridge
Future Love Paradise
Rather than beginning the new year by sharing our thoughts on the outlook for 2025 with clients, we thought it would be more interesting to share the themes which we expect to be both interesting and important on a longer-term view. As the physicist Niels Bohr amusingly, commented “predicting is exceedingly difficult, especially if it is about the future.” It is also difficult to produce genuinely new or independent themes, so we have focused instead on picking out those which will make a real difference and hopefully provide some slightly more imaginative insight and opinion into those themes. Seal’s 1991 classic song “Future Love Paradise” envisaged a more utopian outlook than perhaps we can envisage. Despite the gloomy outlook for most economies outside the US we do see many things which will be beneficial to both economic growth and hopefully wider prosperity and investment performance.
Where Are We Starting From?
Before we begin our discussion on the various themes we have found, it is important that we remind ourselves of where we are starting from. We would characterise the current global situation as lopsided. Although the largest economy in the world ie the US continues to enjoy high levels of growth and employment, most other parts of the global economy are facing a broad set of problems and challenges. Even in the US, where stocks have enjoyed a remarkable two-year period of strength, many parts of the market and economy are not fully participating in this rally. Also, the distribution of wealth in individual populations is at its most extreme. This has led to an unstable political backdrop.
We try to avoid allowing our personal political views to influence these pieces, but it is undeniable that there has been a strong shift to the right and more populist administrations. This has led to a slew of proposed policy changes.
It is arrogant to suggest that the change in policies that this shift has created are illogical, but they are certainly different. For example it is as yet uncertain whether the incoming US President Donald Trump will fully follow through with his threats on tariffs, but it seems pretty clear that there will be some degree of action.
We remain sceptical that this policy will be a success in the long term but even if we are wrong, it will definitely create a great deal of uncertainty over the next one to two years. Our fear as always is that populist governments tend to be more reactionary, and therefore short term in their decision making, which is the exact opposite of what is required. In our view the chronic underinvestment in infrastructure and resulting anaemic improvement in productivity are a result of the absence of long-term plans and policies in most major economies.
We will comment on demographics in some detail later in this article but the overriding feature which every developed country will have to contend with is an ageing population, which could potentially result in a shrinking workforce. There are only three effective solutions to this: try to increase the birth rate, which is challenging; allow significant and sustained legal and illegal immigration, which is not part of the populist playbook; or massively increase productivity, which we will discuss below in our thoughts on artificial intelligence (“AI”). If none of these are successful then there will be profound budgeting decisions to be taken on funding healthcare costs for an ageing population in a low growth economy. It will be even more difficult to achieve this against a backdrop of already stretched government balance sheets, and more importantly the fact that most major economies are currently running budget deficits, which will mean overall government debt levels around the globe are likely to continue to rise.
Despite these problems and challenges however we are confident that the global economy can continue to make progress over the next decade. We may not agree or like the changes that various new regimes choose to make, but some will undoubtedly be successful and ultimately, as we have consistently reminded clients, change equals opportunity.
Artificial Intelligence (”AI”) - The elephant in the room
We are certainly not being particularly original by starting our conversation with our thoughts on AI. However, it is the elephant in the room in terms of our earlier comment on improving productivity, and indeed the general outlook for equity markets over the next few years. Many argue that AI is nothing particularly new and merely a rapid expansion in the rate of computing power increase. It is also not clear in our own minds as to whether the long-term outcome of AI will be a utopian or dystopian event. We actually tried to produce this article using two of the major currently available AI systems. We will allow our readership to decide if we actually used it in the final draft, but it was interesting that on the whole it produced broadly the right ideas but lacked depth and was not particularly comprehensive in terms of alternative views in the areas it identified.
The technology will obviously improve rapidly in coming years, but we have three fundamental concerns about its development: the first is that it will be focused more on the consumer, where we are sceptical of the benefits it will provide to the wider economy. For example Apple made a great play on the announcement of its new AI system about phones being able to tell you when your plane is late. Surely it would be more useful if that resource were applied to preventing the plane being late in the first place. The second concern is that it is far from clear how the vast spend being applied to this area by a multitude of companies and investors will actually earn a return in any reasonable time scale. If AI is less successful than is anticipated, we run the risk as a global economy of allocating a vast amount of unproductive capital, time, and energy. Lastly, we would also highlight that the already obsessive demand for data is only being accelerated by AI. In some areas this is undoubtedly a good thing but possessing and analysing data does not in its own right solve problems. A good example would be the credit market where there is a vast amount of historic data which can be analysed when choosing to offer new loans to individuals or businesses. That is fine except it does not improve the overall creditworthiness of the entire market.
Despite our scepticism the overall leap forward in computing power and capacity that AI and its derivatives will provide, will have a profound effect on both the economy and everyday life and will undoubtedly produce some remarkably interesting investing opportunities. The areas which we have identified as likely to produce meaningful market and profit opportunities are mobility, robotics, healthcare, and education.
By mobility we mean automated vehicles. This will initially take the form of driverless taxis but will ultimately lead to the vast majority of automobiles being driverless. This will not only improve the utilisation of vehicles, which will mean we will need far fewer, but should also greatly reduce traffic fatalities and also congestion due to far more reliable and predictable driving patterns. This is undoubtedly an area where AI can substantially improve productivity. The difficult part is assessing who will be the winners in terms of capturing the value chain. Will it be the car manufacturers such as Tesla, will it be those that store, maintain, and charge the vehicles, will it be those that provide access to services ie Uber, or will it be someone who attempts to control the whole value chain such as Alphabet through its Waymo subsidiary?
With robotics we are focussing on the use of automation in its widest sense. Much of the hysteria around AI and robots is the concept of huge numbers of humanoid robots replacing humans currently executing manual tasks. We are more interested in the opportunity for the sheer processing power that AI provides in terms of crunching and manipulating data to be focused on dramatically improving the productivity of all manufacturing processes. This will also create huge demand for more advanced manufacturing equipment which may bring a new lease of life to the industrial sector. AI should dramatically improve the speed, precision, and complexity of virtually every production line.
Healthcare is one of the areas we are the most excited about given the ability of AI to dramatically shorten the time it takes to deliver new drugs. It will improve not only the ability to discover new drugs using existing datasets but also enable pharmaceutical companies to develop personalised solutions to individuals’ health requirements. This will also be the case in education where standard materials and teaching by rote can be delivered in a much more efficient and timely manner. This will again allow the personalization and specialisation that the modern education system so desperately requires to be delivered at a much lower cost and hopefully with much better outcomes. A good example of this which already exists is the ability of individuals to have conversations with AI driven language apps when learning a new spoken language.
Demographics - A science not an art
Frequent readers of our investment pieces will be familiar with the fact that we regard demographics as an extremely powerful tool. With the exception of short-term birth rates, it is a very predictable set of data across a wide number of countries. In our view the reason it is not employed more widely is that its impacts tend to be extraordinarily long term, which does not suit governments or policy makers as we discussed earlier. The simple fact is that demographics impacts everything.
The analysis of demographic data yields both positive and negative trends, but it provides a very accurate roadmap around which governments and companies alike can fashion long-term plans. The more obvious concerns tend to focus on dependency levels, put simply will there be enough younger people around in the future to both create the wealth and physically help a rapidly ageing population in most developed countries. This loops back into our previous comments on immigration and productivity but also has massive implications for infrastructure, retirement ages and pensions. One possible solution may once again be provided by AI in that there is a genuine opportunity for it to dramatically improve fertility rates particularly in older mothers.
Then at the micro level it produces a huge set of challenges for many global and domestic companies. The youngest baby boomer, ie those born between 1946 and 1964, is now 60 (as this author is well aware). It seems likely that the demand patterns of the generations that succeed the baby boomers will be much different. For the branded companies there is a challenge that brand relevance and loyalty will diminish over time and that they would have to run a larger number of smaller brands with more limited shelf life then is currently the position. Consumers may well demand more unique and personalised products and services than is currently the case.
Healthcare - Breaking the circle
The challenge which all governments recognise as the most important but continually shy away from making long-term decisions about is healthcare. As we have commented above demographics are working to produce a large and steady increase in demand for healthcare services against a background of weak growth across large parts of the world. Put simply we can barely afford current levels of provision and will increasingly struggle to meet those of the future.
Governments and populations do not like discussing how much a life might actually be worth ie the costs of keeping someone alive when in an extremely poor state of health. Also, governments of any particular flavour, but particularly those which are more populist, do not like to appear to be mandating how individuals should live or behave. The latter is of vital importance and comes down to whether governments or anybody else can have an impact on changing behavioural patterns, namely diet. Being particularly hardnosed, the current huge demand for weight loss drugs is largely a result of poor diet and exercise regimes. From an economist’s perspective It seems asinine to deal with the symptom rather than the cause. This is also true in the long running issue of the failure of most governments to redirect resources into the secondary part of the system in order to alleviate pressure on the far more expensive primary sector ie more investment in GPs, clinics, nursing homes, hospices etc.
If we assume that there is no change in this equation then the focus would have to be on making better uses of the resources we already allocate to healthcare and then having the more difficult conversation around what we are prepared to forego in order to merely maintain current levels of services. There are many opportunities to achieve the former which will provide interesting investment opportunities in the companies that provide drugs, services, and equipment to the healthcare industry. We have already commented on the impact AI can have in personalisation, but it will also hopefully have the ability to analyse and identify patterns in the vast datasets that it already possesses. This should lead to more efficient delivery and implementation of many things across the wider industry. This does however rely on the industry having the mandate and skill set to enable all of this. One thing is certain and that is that every developed country will be spending appreciably more on healthcare in both absolute and relative terms in 10 years’ time than it is now. Our hope is that this money will be spent more efficiently.
Trade - “Double, Double Toil and Trouble”
With the incoming US president really stirring the cauldron about tariffs and where the US would and would not like to do business moving forward, trade has moved to the top of both the political and economic agendas. In truth there has been many worrying trends appearing over the past few years. President Biden did little if anything to reverse the restrictions introduced by Donald Trump in his previous presidency, and as such there has been a deterioration in the free flow of goods and services across the globe. This has been termed “deglobalisation.”
As Donald Trump has increased the rhetoric around more punitive tariffs with several countries everybody seems to have become a tariff expert. As we have said it is impossible to figure out the long-term impacts of any of the restrictions that the incoming administration is suggesting. What we do know is that it will not simply be a case of the US raising tariffs and all the productive capacity that it has lost in the past 50 years comes flooding back to the US. There will be many unknown consequences and surprises which the market and the government will have to deal with. In the earlier Trump presidency, there was a tendency to shy away from these problems and kick the can down the road. If he does pursue an overly aggressive set of policies this will simply not be a choice, this time around. Although the US is certainly the leading global economy, it only represents around 25% of global GDP. It has managed to translate this into a dominant position aided by the fact that the dollar remains, despite China’s best efforts, the global reserve currency particularly in times of stress. This has resulted in the US equity market representing over 70% of most major global indices. However, there is a real danger that if Donald Trump does pursue his most aggressive plan, then he will force major groups of countries in the rest of the world into forming closer trading blocks. This does little to achieve the improvements in global productivity which we so desperately need.
The other major unknown in this area is China, which although struggling economically as it recovers from a major property bubble and an inability to stimulate domestic demand, still has huge foreign currency reserves, unparalleled trade surpluses with all other parts of the world and the ability, due to its centralised planning system, to take very long-term views. We also believe that China learnt a lot from its previous engagements with Donald Trump and will take a more disciplined and forceful approach in terms of its relationships with the US and its reaction to any escalation in global trading restrictions. The rest of the world, including Europe, the UK and Japan will simply have to sit on the sidelines and see how well or badly they perform in this brave new world. The gloomy outlook would be that trade wars lead to actual wars which has often occurred in history. Hopefully, the chances of this are very slim.
Although as we have outlined, we see trade wars and tariffs as damaging to the global economy, the fact that flows of trade and where goods and services are produced geographically will undoubtedly change in the next decade once again will provide opportunities for many companies in many sectors. Well run companies that are nimble enough to move their assets around the world will continue to prosper.
The Environment - Has to move up the agenda
One of the real disappointments of the past few years has been the extent to which environmental issues, concerns and policies have dropped down the agenda. This has not been helped by the ongoing shift to more populist administrations, nor by the fact that the rampant inflation that most consumers have suffered has tended to reduce appetite to spend money now, to improve environmental outcomes in the future. This simply cannot continue and the discussion on the environment will have to reassert. Partly this will be a generational issue due to the fact that young people are generally more concerned about environmental issues, but also the decision to not deal with them will simply start to have a more marked impact on short term costs for governments and companies. This combination of popular thought and economics will mean there will be great opportunities for companies that produce goods and services that make a real difference.
The one area that has continued to grow consistently, even in these more challenging conditions, has been electrification. The developed world has chronically under-invested in its power generation and power transmission capabilities over the last fifty years. This became particularly clear at the end of the last decade when the demand for green power started to accelerate and there were great difficulties connecting new green power sources to national transmission systems. Although this demand has waned in the past few years, the advent of AI and the huge power requirement to fuel its enormous data centres has only highlighted the weaknesses further. Demand for clean energy will start and continue to grow over the next decade. But the fact that most countries now have energy security extremely high up their agendas will mean the use of fossil fuels will persist and the move to green power will take longer than originally expected. As has been the case for a long time, the development that would change all this would be a step change in battery technology. The other debate that will have to be resolved quite quickly will be whether it is politically acceptable to renew existing nuclear facilities, and more importantly to build much more capacity. Another area that has recently come onto the radar has been the concept of circularity, which is the reuse of materials and obsolete goods in the manufacturing and supply chain. This is an uncontroversial and meaningful concept that could yield major short-term financial and environmental benefits.
Other Things to Keep an Eye On
Defence Spending – The unfortunate conflicts in both Ukraine and the Middle East have brought a surge in renewed interest into investment in defence related companies and many have performed well in share price terms. Although we are conscious of the fact that many of our clients will find this uncomfortable, we have to highlight the fact that investors on the whole have become more sanguine and flexible over where they draw the line on what they will invest in. If the world does become more splintered and the US continues to reduce the vast amounts of miliary aid it currently spreads around the globe, then it is inevitable that individual countries will have to spend more on defence and once again less on other things.
Debt In All Its Forms – Credit quality has been remarkably high and bankruptcies and insolvencies surprisingly low for some considerable time. This was explainable in the period of exceptionally low interest rates but is less so now. We suspect this is partially due to the vast swathe of the economy which is owned and lent to by the private equity and credit players. The level of disclosure they have to provide is very limited. In addition their decisions in times of distress are often not logical. We suspect this is a problem waiting to happen.
Deregulation – With the possible exception of the EU and Japan all the major economies are on a path of reducing regulation. With the main cheerleader for this trend being the US then there will be profound effects on markets and individual companies. We are not fans of excessive regulation, but nor are we keen on it being stripped to the bone. However, the fact that it is changing will create more risk and probably of a scale the market is generally not anticipating.
Conclusion
The trends we have outlined and discussed are by no means an exhaustive list, and the one thing we can be sure of is that others will come and go over the next decade. The easy part of the investment process is identifying the trend and discussing it in detail. The harder part is deciding how best to capture these ideas in client portfolios. In general we prefer to wait for the picks and shovels players to emerge rather than invest in the real pioneers. Although this means we sometimes miss out on the exponential returns that successful early adopters can achieve, we prefer the lower risk and volatility that later stage operators provide.
This approach means we are faced with a series of quandaries, and we make no apologies that we take our time to resolve these. AI is a multi-faceted opportunity and although we are clear on our choices in certain areas, we still have work in progress on others. In demographics and healthcare, we know what we want to be exposed to, with the challenge being how much capital to deploy in the short-term into ideas which may take some time to come to fruition. Our views on trade will be finalised in the next few months as we get better clarity on what the new US administration will actually do. We have pinned our flag to electrification in the environmental sphere but remain eager to find other plays.
Overall, we remain positive about the investment opportunities which will appear in the coming decade. It will be vastly different than both the earlier five-and ten-year periods and one where the global economy has a real opportunity to set itself back on the right path.