As a general rule of thumb, geopolitics is not a huge driver of returns over the long run. (UBS)

Can the US economy really continue to grow at the same pace?
In our view, there were several factors that led to a faster than expected economic growth in 2023, which seem somewhat unlikely to repeat themselves this year. We expect 2024 to be a year of consolidation, as the majority of pandemic-induced macro imbalances have largely corrected themselves.


Thus, in a context of more balanced supply-side and demand-side dynamics, we think the economy is likely to decelerate somewhat relative to last year. Our base case calls for a soft landing where growth slows throughout the year but remains healthy overall.


Yet, it would be unwise to think that the US can’t surprise us yet again; just look at the stronger than expected January jobs report, which even accounted for revisions to job creation in 2023. The country’s solid fundamentals, along with productivity gains and potential Fed easing, provide for an encouraging growth backdrop.


Will Magnificent 7 dominance persist?
It is not realistic to think that these tech and growth giants will rise together in perpetuity. As we saw following the recent earnings reports from Alphabet, a high bar means the margin for error is small, and these companies will now have to beat across the board to please the market.


We think a key theme this year will be differentiation among the Magnificent 7, with some winners and some losers (we are already hearing new terms emerging like the Fab 5 and the Super 6). It’s easy to forget these are seven very different companies. In our view, the ability for each of them to monetize new revenue streams, such as artificial intelligence, will be the difference on whether they remain at top or not.


Is AI really worth the hype?
We believe artificial intelligence (AI) has hit a significant inflection point and will be a key driver of long-term returns, despite some scope for near-term disappointments. This sector size has enormous room to grow; note that we expect spending on AI infrastructure to expand at strong double-digit growth rates over the coming years.


When it comes to how to invest in AI, it’s more complicated. In past tech cycles like the dotcom era, it was all about disruptors—new young companies eating away at market share. With AI, incumbents are currently in the best position; this speaks to the big companies getting bigger. In our view, the next set of opportunities in AI will come from the broadening out of demand and monetization of its applications.


Should I be concerned about recent geopolitical developments?
As a general rule of thumb, geopolitics is not a huge driver of returns over the long run. In fact, our team recently refreshed an analysis of 30 big shocks since 1940, Managing wealth through crisis and war . The conclusion was that, yes, there is often near-term volatility; yet, three months out, returns were positive 60% of the time; three years out? It's 90% of the time. For most investors, geopolitical events are interruptions, but usually not inflection points.


As expected, most recent questions have centered around the Middle East and the potential impacts to trade and oil markets. On shipping, we still don’t believe the tensions in the Red Sea will meaningfully impact the economy or inflation. Meanwhile, on the oil front, we stand by our base-case that significant disruptions to global supply should be avoided.


Still, elevated geopolitical tensions do speak to having some hedges in place. We believe investors can benefit from having up to a 5% position in gold in long-term portfolios. And within equity allocations, our preference for energy is a good way to hedge against the risk of higher oil prices.


What could be the impact of the US election for investments?
For now, it looks like the presidential elections could be a re-match of 2020, between President Joe Biden and former President Donald Trump. Read our report Implications of a potential rematch for more. While it may be too soon to start hypothesizing how a potential second Trump term could be, we acknowledge that market participants tend to believe that a Republican-led administration would likely result in some de-regulation in sectors such as energy and finance.


Moreover, we think is safe to assume that a potential Trump administration, like the previous one, would repeat its stringent foreign policy approach, with the possibility of trade tariffs, increasing volatility for certain markets, including selected EM countries.


Finally, note that every election year there is a lot research on the market impact, all of which ends up with conflicting conclusions. As you can imagine, there are a lot of ways to slice and dice the data. In terms of politics, it seems to us that the best you can do is express your views with a vote, not a trade.


For more read the full report Answering 5 big questions on investors' minds 2 February 2024.


Main contributor: Solita Marcelli