On the one hand, we have seen the continuing tragedy of war in Europe and then atrocity and terrible vengeance in the Middle East. The surprise has been the limited extent to which this has impacted the global economy and the capital markets, where returns have been pushed ever higher by the AI-charged Magnificent Seven[i] delivering more than half the market gains.
The advent of AI in the workplace – and in places of learning – is much heralded and a new suite of CEOs have become regular public commentators and household names. I wonder how many of them will last. In the absence of quantum hardware, companies are mostly targeting productivity gains from AI over the immediate term. Where this all ends is probably for younger generations to predict – I recently read Louis de Bernières’s[ii] latest novel, Light Over Liskeard, that foretells a dystopian Britain where quantum cryptographers are the new masters of the universe, work has ceased for most, and humanity has begun to lose all purpose.
This year, in contrast to the one past, the forward consensus seems to be a soft-landing over recession; albeit with most hedging, noting that much needs to continue to go right to both deliver and sustain it. Invariably these predictions are plain wrong, or too vague to be useful, so the contrarians in SKAGEN – always in the majority – are less interested in consensus and more interested in what is currently under-estimated and yet to be priced. Here, with elections on both sides of the pond, geopolitics still looms large; however, it seems unlikely that future policy shifts will be of such magnitude that the economy is at risk – there is simply too much to lose.
Diversification matters and market timing matters less
One less welcome development has been the return of inflation. For those of my generation there have been few surprises; however, many market participants find themselves unexpectedly grappling with the unfamiliar intricacies of ten-year treasury yields and such like. Here in Norway, it is evident that there remains a structural underweight in fixed income exposure in many private investment portfolios, and it is my very firm recommendation that clients consider this and discuss diversification with their advisors in SKAGEN lest this becomes an expensive oversight.
Whether the suspected interest rate tops in the developed markets will be supportive to emerging markets seems likely. Either way, a greater spread of investment return amongst asset classes seems increasingly certain for the year ahead, and the two-decades wide small cap discount[iii] is hardly likely to endure. All this will undoubtedly present opportunities to active, and value-based, investors such as SKAGEN.
Perhaps one lesson from 2023 has been the importance of staying invested in the market. At the start of the year, many private investors were risk-off given the evident uncertainty around inflation. While for some, inflation understandably brought fears around income and the need to make provision for higher costs; for many, the intention was to time any bottom. With much of the market gains coming in the first quarter, these market-timers were caught out, as illustrated in a recent analysis published by Morningstar. SKAGEN’s views on market timing are well known; we think few can do it, so most should not try. Helping clients to navigate these decisions lies at the heart of SKAGEN’s Gamma concept – how clients act, and we will be focusing much of our communication and advice on this in the year ahead.
New Year Conference – same procedure as every year
As 2023 draws to a close, we again start to eagerly anticipate one of the most important events in our yearly calendar, namely our 21st New Year's Conference. On 10 January 2024, we will be hosting a hybrid event out of Oslo, welcoming a line-up of prestigious speakers. We look forward to hearing from the likes of renowned Baillie Gifford investor and Kinnevik chairman James Anderson, CFA fellow and market strategist Russell Napier, Chinese economist and LSE professor Keyu Jin, author and geopolitics expert Chris Miller, CNN global economic analyst Rana Foroohar, and FT columnist and sustainability challenger, Stuart Kirk.
Indeed, this very week, Chris Miller’s book, Chip War: the fight for the world’s most critical technology, received the prestigious Arthur Ross Book Award from the US Council on Foreign Relations. Meanwhile, Keyu Jin’s book The New China Playbook: Beyond Socialism and Capitalism has recently been named by Fortune magazine as one of the ten books every board member should read.
All that remains is for me to wish you and yours a merry Christmas and the very best of good fortune for the year to come.
[i] Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla
[ii] Author of Captain Corelli’s Mandolin
[iii] Forward P/E: Russell 2000 vs. Russell 1000 (30% discount)