From regional bank failures to unresolved geopolitical tensions to explosive growth in artificial intelligence. We have seen it all in 2023, and there are still many questions investors face as we head into the new year.
Paul Holba, SVP and CIO, Empire Life Investments Inc. breaks down some of the key themes that we expect will impact the markets in the coming year, such as potential rate cuts, unresolved geopolitical tensions and considerations when it comes to big tech and AI.
Summary:
Hello, I'm Paul Holba, Senior Vice-President and Chief Investment Officer at Empire Life Investments Inc. I want to wish you a very happy and healthy new year and take this opportunity to give you an overview of several key macro market themes we are monitoring. These include Inflation, geopolitics and tech, specifically artificial intelligence.
First, moderating inflation and the prospect of rate cuts
To tackle inflation, the U.S. Federal Reserve and Bank of Canada continued applying the brakes on the economy through interest rate hikes in 2023. Although headline inflation has been easing, core inflation, which excludes volatile items such as food and energy, remains above the 2% target set by most G7 economies.
Equity markets are optimistic, pricing in a “soft landing” as economic growth remains strong, despite higher borrowing costs and stubbornly high inflation. Yet, there are still signs of a slowdown in some developed economies. Central banks began weighing the risk of causing unnecessary harm to the economy by leaving rates high as inflation falls.
However, in the last rate decisions of the year, the U.S. Federal Reserve, European Central Bank and Bank of England all held rates steady at high levels. The U.S. Federal Reserve even released projections that the Federal Funds Rate target will be 0.75 percent lower at the end of 2024 than they are today. Time and data will tell.
Next, navigating Politics & Geopolitical tensions
Politics will play a big role in 2024. We will continue to monitor several geopolitical events this year, particularly between the US and China. There are still many ongoing tensions between them that have yet to be resolved. This includes trade tariffs, a so-called “chip war” between the two countries relating to semiconductors and military confrontations over the South China Sea. Souring relations have shaken up the business community, with many companies, backed by local government grants and loans, considering plans to diversify their supply chains, ultimately shifting risk away from China.
As we find ourselves in the coldest months of winter, natural gas supplies in Europe also remain a persistent concern.
2024 also marks the start of Brazil’s membership in the OPEC+ (the Organization of the Petroleum Exporting Countries) alliance.
Finally, unpacking Big Tech and Artificial Intelligence
Big Tech mostly drove the S&P 500’s performance in 2023. Dubbed the ‘Magnificent Seven’ - Apple Alphabet, Meta, Microsoft, NVIDIA, Amazon, and Tesla – they collectively contributed about 2/3 of the S&P 500’s return in 2023. Big tech’s growth has largely been the result of the advancement and speculation in artificial intelligence (AI). We will continue to monitor Generative AI tools and other innovative technologies, as they are rapidly advancing and had generated significant interest in 2023. We will be watching to see whether AI can help companies realize the promised productivity gains.
We will also continue to monitor ongoing progress towards a clean energy transition, including the rollout of electric vehicles, especially outside of North America, and the increasing popularity of nuclear as an alternative to fossil fuels.
As the themes of inflation, geopolitics and technology continue, and other unanticipated market events change and add elements of uncertainty, our forward-looking approach and collaborative team environment ensures that market opportunities and challenges are viewed through multiple lenses. As we enter the new year, I would like to thank you for your continued support and reiterate our commitment to continuously monitoring these themes, and others as they come up, to assist us in making the most informed investment decisions on your behalf.
Thank you for watching.
January 2024