'There may be trouble ahead....... Let's face the music and dance.' Irving Berlin
A tangible shift is under way in the West from both a societal and political perspective.
Incumbents were turfed out last year in 85% of elections. False equivalence is amplified in political debates on a growing array of increasingly partisan media platforms. Also feeding voter anger are two economic factors: inflation and middle-class incomes.
Central bankers are close to taking a victory lap for defeating inflation, but the cost of living is now about 30% more expensive than 5 years ago. The weekly grocery shop is a regular reminder of feeling worse off.
Wages for low-income workers have increased markedly in recent years, helped by rising minimum wage rates and low unemployment. Also, the wealthy have had a good decade, but as these different cohorts move up the income scale, it is the stalling of middle-class incomes that is stoking much anger, i.e. attaining a good degree offers less of a guarantee to a much higher income than unskilled workers.
All of the above has opened the door to populist movements and governments that prey on status anxiety and feelings of being worse off or left behind.
The political implications appear to be a shift away from concerns about climate change, the global commons and institutions such as NATO and the UN. Instead, the emphasis is likely to be more on protectionism, transactional international relations, and perhaps a bifurcation of the West versus a ragtag (and nuclear armed) gang including Russia, China, Iran and North Korea!
All of this will be catnip to a polarised media, making us all feel gloomy and more risk averse. But strictly from an investment perspective, I actually see much opportunity.
At a company level profit margins seem likely to stay at record high levels, helped by deregulation and tax cuts (in America). I am beginning to see companies freeze or cut head count but continue to grow because of efficiency gains owing to artificial intelligence (AI). Indeed, the pace of technology disruption is likely to accelerate, and I anticipate outsized returns for companies that innovate and adopt new technology. I think we will also see a rapid demise of certain industries and companies that think business as usual is acceptable.
Over the last 20 years we have seen the global financial crisis, sovereign debt crisis, Covid, deepest recession in 300 years, highest inflation in 40 years and war in Europe. Over this same period, albeit with some volatility along the way, companies and stock markets have generally done very well.
I think Fred and Ginger have shown us the steps!
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
