There is more to life than AI – that could be the title of this new series of letters. At a time when the main performance driver for financial markets is the conviction that artificial intelligence will not merely transform our world but also save it, we believe it is appropriate to examine other key trends (without claiming to be exhaustive) that are important for any long-term investor to consider. Globalised capitalism in its current form (a quest for infinite growth made possible by the continuous fall in interest rates over the past 40 years and the over-optimisation permitted by globalisation) is dysfunctional to the point that it is threatening the human life on this planet. This model has damaged biodiversity and the climate, increased inequalities, created bubbles and led to capital misallocation. By prioritising efficiency over resilience, this model has compromised the long term in favour of the short term. The next twenty years, characterised by deglobalisation and higher interest rates, will see the search for resilience dominate, leading to a weaker and less optimised growth cycle. This new cycle calls for consideration of the limits of systematically using financial and ecological debt to finance economic growth. In this cycle, non-financial criteria will be predominant in generating financial performance while the contribution of debt towards the generation of financial performance will be smaller.
This quest for resilience requires creating more local ecosystems, while also relocating the production of goods and services closer to consumers, along with higher and less optimised levels of capital for businesses. The age of financial engineering is likely over. Companies and governments that fail to act consistently over the long term could suffer not only financial setbacks, but also social, political and even existential crises.
Against this backdrop, and in view of such far-reaching changes, we believe that beyond economic forecasts, modelling of expected returns on our funds, and day-to-day management activity, it is essential to have convictions on the major fundamental trends that will shape the structure of our economies over the coming decades, especially if the world enters a phase of weak and less optimised growth. In such an environment, identifying a few strong growth trends seems essential to maintain expectations of satisfactory performance.
Below are the ten trends that, in our view, will shape the coming decades. In this first letter, we will discuss the first five trends on this list and devote a second letter to the five remaining ones.
1. Demographics: the Indian Ocean as the future centre of the world
2. Deglobalisation: shifting from a West-centred world to a multipolar world
3. Economic value creation: from efficiency to resilience
4. Risk approach: balancing risk-taking and insurance
5. Artificial intelligence: a revolution or an economic mirage?
6. The increasing weight of governments in economies
7. The debt problem
8. The boom in capital expenditure
9. Agriculture and urbanisation: a model that must pivot if it is to endure
10. Labour versus capital or the growth of inequality
Publication
CIO Letter – November 2024