James Pomeroy: Gamechangers are these big themes impacted by the events happening every day. They’re the things that we don’t spend a lot of our time worrying about on a day-to-day basis. They’re not the latest inflation prints, central bank announcement, or latest earnings announcement.
"Gamechangers are big themes impacted by the events
happening every day."
What they are, though, is the things that are chipping away at the economy that we may not notice, and they're crucial because these are the themes that are the bedrock of the economy that we're dealing with in terms of what drives growth, inflation, the labour market, and the long-term potential of the global economy.
If you follow these trends and get them right, you can make the most of what's happening in the economy – spotting trends that are emerging and using them to identify winners and losers. Hopefully, that's an important lesson for a lot of investors.
James: There are lots of overarching themes, and I put them into three distinct boxes.
The first is demographics, which is fundamentally underappreciated by a lot of people when they think about the economy. You say demographics and people's eyes glaze over, they think 30/40/50 years in the future without acknowledging how crucial some of these demographic trends are today, not just for the size or the shape of the population, but what demographics do in terms of dragging trends along with it because of the changing shape and dynamics of the world’s population.
The second theme is technology, and we can easily underestimate how the world is changing when it comes to technological adoption – the speed at which some of these developments take over our lives and start to dramatically change the workforce or change the way we consume or change the fortunes of products that are winners and losers.
A great example is Artificial Intelligence (AI): this time last year we wouldn’t have talked about AI being this massive, fundamental technology, and yet you almost can't have a conversation without it at the moment. That's a great example of getting technology trends right.
The third trend is around the environment. This includes a whole load of different sub-themes, but at the heart of it is the energy transition. Essentially, what is happening with the speed of energy change for investment, as well as what this could mean for both carbon emissions and the cost of energy for individuals and businesses.
Those changes could have a massive impact on the global economy going forward.
James: You have a few things at play here, and gamechangers are the undercurrent of what’s happening in the economy. These really determine your fundamental potential growth rates and the sectors that will be winners and losers.
"Our outlook is for softer growth because it's unlikely that this period of high
inflation in the financial system is going to lead to a pace of growth."
If you have an ageing population, or a growing young population in certain parts of the world, or rapid developments in technology, that sets your starting point for where growth and inflation is likely to be over the medium term.
Then, you also have to look at your cyclical overlay, which comes from what central banks are doing with policy, what happens with high inflation, and other challenges around the financial system. Essentially, our outlook going into next year is for softer growth because it's unlikely that this period of high inflation, elevated central bank policy rates, and uncertainty in the financial system is going to lead to a pace of growth above and beyond what you would expect given those underlying factors.
This is the situation we’re in currently with central banks trying to slow down the economy. They're trying to make people want to borrow less; they're trying to lead to a bit of a slowdown in activity, and if we get that in the next year or so, it’s going to mean slightly weaker growth.
James: They’re important, and they are longer-term trends that are happening as global trade is reshaped. A part of what is happening is that production is leaving China because it's a much more costly place to produce things than it was in the past, and some companies have had uncertainties about geopolitics, trading relationships, tariffs, and all of these various things that have happened over the last few years.
These companies are thinking about where they can produce instead – be that in other parts of Asia, such as Vietnam or India, or closer to home [for the USA] in Mexico or parts of Europe, for example, for the UK and more affluent European Union countries. This trend is ongoing.
"The global trading system is evolving to be less focused on Chinese
exports. It will likely become a more diversified system."
One of the big questions for me in 2023 is “do businesses take that shift as seriously in a world where supply chains are no longer snagged?”. It was one thing in 2022 when you couldn't get stuff, and the cost of shipping was five times what it was before the pandemic, and these supply chain challenges were front and centre to what businesses were thinking about. Suddenly, you were thinking about where you're producing and your supply chain diversification.
However, we’re now in a situation where statistically we are in the loosest supply chain system that we've ever seen. If you look at some of the indicators – such as delivery times, businesses, and shipping rates – they're at the best levels they’ve been in a long time. This might change some of the intensity by which businesses think about their supply chain.
But don't forget that even if that does happen in 2023, underneath it all the global trading system is evolving to be less focused on Chinese exports. It will likely become a more diversified system in terms of production base.
