SustainAbility: The triumph of Optimism

It can be hard to be optimistic. This is partly due to human nature, which tends to weight bad news more heavily than good. It is also due to the media driven world we live in understanding that bad news sells. Take readily available pessimism, mix in with human behavioural biases and at times it seems like society is going backwards, not forwards.

This is observable in equity markets. Most have reached all-time highs this year, with some such as the US increasing more than 20%, yet many investors still worry about recessions, valuations and geopolitics much the same was as they did a year ago.

Exactly a year ago I wrote this in our update:

“All the great bull markets were disbelieved when they were occurring. Their origins tend to be in crescendos of bear markets and arguments of structural, negative, change occurring. These views take many years to change and often result in investors remaining on the side-lines whilst attractive opportunities pass them by.

We saw this after the great financial crisis of 2009, which sowed the seeds of one of the great bull markets that lasted until the end of 2021. Many investors could not accept a new bull market had begun, and some still don’t accept the capital appreciation seen in the 2010s believing it was fuelled by inappropriate monetary policy, not innovation and growth as we believe.

Similarly, today we find very few investors and market commentators discussing the potential for the next 10 years to be one of outsized returns. Somewhat paradoxically, this makes it more likely to happen.

The case for a structural bull market for us lies in trends occurring at the micro level. As we have written previously, atoms, bytes, and genes which to us represents nearly all things in existence provide a simple and powerful framework for understanding them. Atoms represent the physical world and ongoing infrastructure investment such as the Inflation Reduction Act in the US. Bytes represent digitisation and the continued prevalence of artificial intelligence. Genes represent continued advances in medical science such as obesity and Alzheimer’s treatments.”

This year the S&P 500 is up 27% in 2024 at the time of writing, after an increase of 24% last year! This is indeed a bull market, the length of which none of us can know, but it is predicated on some of the most exciting innovations we have ever seen and strong economic growth. In my view, it will need one of these two things to reverse before it (temporarily) ends.

Will 2025 finally see the US tip into recession? We don’t think so!

First, a confession. I too thought there would be a recession in 2023 after the rise in interest rates and oil prices which we saw in 2022. I can argue that it was logically correct, but analytically wrong. There was no recession in 2023 as government spending on infrastructure. A combination of wealthy baby boomer consumers (buoyed by high home and equity prices) spending on services and the gig economy provided an economic tailwind which is still with us today. Fortunately, I did not become wedded to this view, nor is the economic outlook the primary driver for the sustainable investment strategy as it is so hard to get right.

As we look into 2025, I feel the potential for a recession looks small. The new resident of The White House is unashamedly pro-America and pro-growth. It is said the only opinion poll he really cares about is the S&P 500 and will do everything in his power to increase the value of it. This includes de-regulation, cutting taxes, increasing government spending and doing deals with anyone who will further US interests. Trump was a bull market president the last time he was in power, with the S&P 500 rising more than 50%, and he could well be again in his second term.

Trump was a bull market president the last time he was in power, with the S&P 500 rising more than 50%, and he could well be again in his second term.

Of course, there are always risks. The funding of US deficits, land wars in Europe and the Middle East, inflation reappearing, China and Taiwan tensions, or more likely something which comes completely from left field as Covid did, can all derail markets from here. But like a year ago we suspect once again optimism will triumph in the year ahead.

Lessons from 2024

Each year has its own story, and this is no different. 2021 was a year of ebullience; 2022 a year for surviving; 2023 a year of shaking off recession fears; and 2024 a year for artificial intelligence. For investors each year is an opportunity to increase our skills through experience and knowledge building. Here are few lessons:

• Today’s lows can be tomorrow's highs: one of the best performing sectors this year has been banks. This is a sector which last was bathed in glory over 20 years ago, but for regulatory and economic reasons has been avoided almost every year since. More recently a change in the interest rate environment, the end of a multi-year (decade?) realignment of regulation, and operational improvements within banks generally, have led to strong outperformance. Lesson: keep an open mind on everything, especially areas which have been out of favour for many years.
• The US keeps winning: for better or worse, the world is becoming more, not less, US-centric. It has been the defining trend of the last decade, and the strength of the US economy versus nearly all others seems to be accelerating. Corporates we speak to point to a vast marketplace for their services, world-class talent wanting to work there, measured regulation, cheap energy and a culture which embraces success as reasons why. Europe remains mired in fragmented politics and is too dependent on a manufacturing base which is being out-innovated by China and is no longer cost competitive. Asia has pockets of success, but nothing on the same scale. Whilst the US stock market is expensive compared to other, price is what you pay, and value is what you get. Paying the higher price has been good value this year.
• Innovation drives shareholder returns – each year the Financial Times has a word of the year. This year it might be ‘Nvidia’. This company is a reminder of the power of innovation in driving investment returns. Most industries fight over static addressable markets, hoping they can take market share. True innovators create their own end markets through new products and services, and this can lead to exceptional investment returns. This was a year where investing in innovative companies beat most other outcomes.

What will be the lessons of 2025? Some will be new, but some will be old. I believe that patient optimism with an eye to innovation and an open mind to everything is a good set of characteristics for any investor. After that, it becomes who has the better temperament to enact them.

As this is the last update of 2024, thank you for your support and interest. This update will be back in 2025.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.