Dear investor,

Throughout 2023, I wrote that the prevailing pessimism was not justified. There were - and still are - many underlying opportunities to be uncovered in the main causes of uncertainty, whose accumulation was a reason for measured optimism. Where do we stand today?

In our view, the main areas of concern are focused around three areas:

The sustainability of high global indebtedness. The trend in public debt over the last twenty years is alarming. In less than two decades, the debt-to-GDP ratio of major developed countries has doubled, in most cases exceeding 100 per cent. What's more, the recent rise in interest rates is both increasing the burden of this debt and undermining the solvency of borrowers. The somewhat modest objective of stabilising a debt ratio relies on the assumption that the growth rate at least equals the average interest rate paid by any given state, assuming zero public deficits, including interest charges. Given most countries’ lax budgetary policies, achieving this objective is politically unrealistic. It is therefore essential that real interest rates are as low as possible, and in any event, below real growth rates, net of inflation. Thus, it is a safe assumption that the compression of real interest rates will become one of the main tenets of monetary policy over the coming months, as the reduction in inflationary pressures gives central banks additional leeway. Accordingly, last December, the FED signalled monetary easing will be forthcoming in the form of rate cuts accompanied by a total or partial halt to its sale of government securities.

The resilience of global activity. Naturally, the prospect of lower interest rates is supporting activity as a whole, with the construction sector, in particular, benefiting. Furthermore, the continuation of accommodative fiscal policies will amplify this supportive environment, notably in the United States, where November’s impending election will encourage the incumbent Democrat administration to act generously. Finally, the lull in all commodity prices, especially energy, is bolstering the purchasing power of consumers, whose confidence is underpinned by buoyant job markets. Who would have foreseen the current prices of natural gas and oil, with the war in Ukraine rumbling on and the Middle East becoming a powder keg?

Geopolitical risks. We did not envisage the current Ukrainian war stalemate as our intelligence on the Russian army suggested it would struggle to resist Ukrainian offences. Furthermore, Putin's current impunity is encouraging Xi Jinping to pursue autarkic politics and fuelling his ambitions on Taiwan. Last but not least, the Middle East crisis has sharply increased tensions in a region that is already notoriously unstable and over-armed, with alliances creating contagion risks to frightening extremes. While it is fanciful to think these tensions will subside any time soon, it is reasonable to believe that the interdependence of the various parties will spare us from a major conflict.

With this in mind, what is the outlook for investment markets? The resilience of global economic activity, combined with falling real interest rates, should underpin the continued strong performance of risky assets. Technology stocks, galvanized by the dazzling progress of artificial intelligence will remain a primary focus, as well as the emerging universe, whose undervaluation will be even more glaring when interest rates fall and the dollar eventually declines. Finally, the accumulation of geopolitical risks makes it more than sensible to have gold portfolio exposure. Its appeal is reinforced by the continuation of lax fiscal policies, now less obstructed by restrictive monetary accommodation.

On this cautiously optimistic note, I would like to offer you my best wishes for a happy and prosperous new year.