It’s that time of year again to pause, reflect and hope to do better in future. Unless, of course, you’re the Conservative Party in the UK or the Republican Party in the US and ‘the race-to-most-nasty’ is the leadership badge of shame soon to be re-spelt with a ‘Z’. Back in the do-better world, a review process can help shape future efforts. So, let’s do a quick check on our four multi-year investment themes we identified almost a year ago in “Four Pictures To Develop This Year”. First, we will remind ourselves of what was written, and then score/review how things developed for AI, Housing, Corporate Credit and Cleantech/Batteries. We kick off with the biggie….. Artificial Intelligence (AI):
“The excellent database resource, Our World in Data, shows annual corporate investment in AI doubling from circa $80 billion in 2019 to over $160 billion by mid 2021. More specifically, the explosion of interest in generative AI (ChatGPT, DALL-E etc) has seen VC investment increase by 425% to $2.1 billion since 2020”
Review: Well, at the half-way stage of this year, 18% of global venture(VC) funding went to AI, clocking a total of $25 billion(Source: Crunchbase). Furthermore, with the tech-heavy Nasdaq index gaining almost 50% this year, Nvidia reaching a trillion dollar market cap and OpenAI hitting an $85 billion private market valuation, it is not hard to identify AI as the single biggest positive driver of investment markets this year. Of course, the trajectory of the cost of money (interest rates) also helps with the confidence bit, but we have written before that November 17 has more than one revolutionary connotation. As of this year, the night of November 17th will be remembered for the $200 billion swing in value between Google and Microsoft in a matter of hours, and entirely driven by the relative success or failure of their respective cloud computing divisions. The AI revolution is in full swing and will continue into 2024
While the cloud has become the housing proxy for AI, what about our own housing markets? A year ago we were concerned:
“Of course, rising interest rates don’t just impact companies. The biggest item on an individual’s balance sheet is likely to be a house and as interest rates rise, so do mortgage rates. The push/pull effect of higher interest/mortgage rates can reduce the price of the assets being purchased, in this case houses rather than growth companies…… indicates a more difficult 2023 for a number of major housing markets.”
Review: Arguably, this theme did not play out in a significant way, unless you were Chinese. Bluntly speaking, the doomsday predictions of housing crashes in the US, Australia, Canada and the UK just did not materialise. However, house prices are somewhat softer in many markets. The St Louis Fed has said median house prices in the US are off 10%. Even the UK with its dysfunctional government, and one Prime Minister(Liz Truss) having a good go at crashing the property market all by herself, has seen price slippage of just 1% (Source: Halifax). The key flaw in the doomster arguments was that most people kept their jobs. Major economies in a state of full employment was not expected as the “vibecession” never turned into a recession. And, if recession is avoided then there’s another asset class which has dodged a bullet; corporate debt/credit. Here’s what we feared….
“In real world terms, the knock–on effect of tighter funding conditions will begin to reveal themselves in 2023 as companies with challenged balance sheets/indebtedness – aka ‘zombies’ – move into distressed territory.”
Review: As a proxy for corporate stress you’d expect high yield bond (lower quality debt) spreads to have risen through the year. But no. They’re actually at their lowest since April 2002. However, we’ve had a few big bankruptcies through the year – Silicon Valley Bank, WeWork, Diebold Nixdorf, Rite Aid, Van Moof, and even Birmingham City Council. By June UK bankruptcies were up 40% on the year before. According to S&P Global, in the first 10 months of this year 561 companies sought bankruptcy protection in the US. That’s more than any year since 2010, except for the Covid-19 hit in 2020. So, I’d give us a pass mark on this but feel there’s another year of stress ahead. In particular, commercial real estate as an asset class is going to witness some very painful write-downs and outright collapses. Check out the recent travails of Austrian billionaire, Rene Benko, and his $25 billion property empire, Signa, for a very current case study. However, not all building is in trouble….
“In some ways, the best proxy for the planet’s race towards reducing fossil fuel dependence is the enormous investment currently being ploughed into production facilities for batteries to power a generational shift to electric vehicles(EV). China in 2020 accounted for 75% of global battery production capacity but that’s going to change. Europe intends to up capacity 5-fold by 2030 and the US isn’t just home-shoring semiconductor manufacturing.”
Review: Like AI, I think this gets us pretty good marks. The cleantech and energy storage(battery) revolution is in full flow. McKinsey reckon $6.5 trillion will be spent every year on capital expenditure/building facilities which, in the words of the latest Cop-out 28 text, will “transition away from fossil fuels”. We did say catch up was required by Europe and the US in battery manufacture, but arguably the US has accelerated faster. Thanks to ‘Bidenomics’ and the IRA Act the US is seeing capital investment in manufacturing reach levels not seen in four decades. According to MIT, cleantech investments in the 12 months to July 2023 hit $213 billion, and was mostly allocated to EV battery manufacturing, renewable energy and green hydrogen infrastructure. No wonder the old-economy barometer, the Dow Jones Index, just hit an all-time-high level of 37,000 points. More amusingly, Trump whisperer, Maria Bartiromo, on Fox Business was forced to say “the economy is doing much better than most people understand.” Wonder how that misunderstanding developed, Maria?
So, there’s a temptation to stick with the same four themes for 2024, but in the spirit of Christmas we’d like to give a bit more. The bonus good news is that Christmas might also be easier on the waistline in the coming years. Yes, AI has stolen many of the headlines this year but there’s a 100 year old company in Europe breaking records too. Denmark’s Novo Nordisk is now the most valuable company in Europe with a $437 billion market capitalisation thanks to its insulin product, turned weight-loss miracle drug, Wegovy. This semaglutide-based drug is a game-changer for up to 750 million people living with obesity. However, there might be even bigger break-through treatments to come. And, it’s all about BIOLOGY.
We are entering the world of gene editing spearheaded by CRISPR technology. Get used to that term. CRISPR stands for Clustered Regularly Interspaced Short Palindromic Repeats. It is a component of bacterial immune systems that can cut DNA, and has been repurposed as a gene editing tool. Only this week we were reading that the FDA has approved two ground-breaking cell-based gene therapies, Casgevy and a new one, Lyfgenia, for treating sickle cell disease (SCD) in patients aged 12 and older. Notably, Casgevy is the first FDA-approved therapy utilizing CRISPR.
Now, think about healthcare spend being almost 11% of global GDP, or $11-12 trillion. The prospect of biology rather than pharmacology being used to eliminate various life-changing diseases is mind-blowing. Furthermore, as the first attempts to regulate AI emerge let’s open our minds up to the probability that these massive new computing powers can save decades of research time. So, as a final thought, perhaps 2024 will deliver a break-through global healthcare solution through the combination of AI and biology. Just imagine, our health becoming your wealth…. I definitely think that would score well.
