'Never interrupt your enemy when he is making a mistake. (Attributed to Napoleon Bonaparte and also from the philosophy of Sun Tsu's Art of War)
Chinese leadership are no doubt watching events in Iran with calm detachment!
So, another quarter and another crisis – this time one of the biggest energy shocks in recent decades. Also, it should be emphasised, a very positive quarter to be invested. At the risk of torturing a second quotation, the great Kenny Rogers said it best: 'You got to know when to hold 'em, i.e. a crisis doesn't necessarily mean it's time to sell.
To attempt an explanation for positive portfolio returns against such a bleak backdrop, it is instructive to go back to the outbreak of the Ukraine war in February 2022. Germany was reliant on cheap Russian gas for more than 50% of its supply. A precipitous drop in supply, almost overnight, augured ill for a depression-like hit to the German economy. But by November 2022, Germany’s gas storage facilities were in fact 100% full.
The catastrophic forecasts of a full-blown energy crisis never came to pass due to the oft- repeated phenomenon of finding workarounds when the alternative is disaster. An echo of this lesson has been seen this year with the closing of the Strait of Hormuz. Again, we saw much handwringing and doom-laden forecasts of oil spiking to depression-inducing levels. But workarounds soon kicked in. These included an increased supply response, particularly from the US, more oil being piped across Saudi Arabia, China reconfiguring upstream activities and an acceleration of energy efficiency. The daily shortage is still serious, but a lot less than the early forecasts.
This is very complex, with knock-on effects for fertilisers and foodstuffs, but my point is that the oil crisis is real, could get worse, but so far is containable with low level hostilities continuing. The initial knee-jerk stock market reaction was soon corrected during the quarter, as it became clear that the global economy proved resilient and inflation expectations remained contained.
Alongside a more measured perspective on the oil price, another big positive for market sentiment has been the dramatically improving outlook for company revenues and profits, particularly in the US.
Over the next 12 months US company revenues are expected to grow by about 11.5%. This is one of the highest growth rates in two decades. Put simply, higher profits exert real upward pressure on share prices, or in 12 months the same shares are materially cheaper!
In my view, one of the most important drivers of long-term equity returns is the growth of company revenues. On this point the news is really very positive. But day-to-day investors are often distracted by dire news stories that impact mood but do not really change the investment landscape.
Turning now to artificial intelligence (AI), I think the evidence is growing that this could cause one of the biggest economic and societal upheavals in human history. TV and newspapers now contain multiple references to its emergence on a daily basis.
The focus is on new consumer apps and the massive amount of investment required in terms of compute and energy. But the size of its impact is perhaps still underestimated. A recent anecdote I’ve read is about the advent of electricity and the huge excitement of the telegraph in the 1840s – a mere sliver of electricity’s ultimate impact.
The industrial revolution gradually moved from steam to electricity. This intelligence revolution is moving much more quickly. The AI company Anthropic had $1billion of revenues in December 2024; currently revenues are running close to $44bn. The most valuable company in the world is the chip designer Nvidia. Its results next month are likely to show revenue growth of 96%.
Technology shares tend to be very volatile because the range of outcomes over the next few years is just so wide. The volatility is likely to spread to more mundane market sectors because all companies will have to fully embrace new ways of integrating AI, or face decline.
So, in summary, I expect strong company profit growth, continued geopolitical crises and higher-than-average volatility in share prices because the range of negative and positive outcomes for companies in the next few years has perhaps never been greater.
Finally, I would like to pay tribute to he in No. 10 Downing Street who likes a good tummy rub or snooze beneath the roses. I do, of course, mean Larry the cat, aged 15, who is now on his 7th prime minister. Let’s hope some of Larry’s longevity and talent as Chief Mouser to the Cabinet Office rubs off on the new incumbent!
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
