3 reasons for investor optimism despite global challenges

Tech boom

While the prospect of looser monetary policy is undoubtedly bolstering equity markets returns, it is the technology sector that has dominated recent market performance - chiefly because of the wave of optimism over the long-term potential of generative artificial intelligence (AI).

One analysis believes generative AI could add trillions in value to the worldwide economy as it automates activities that presently take up much of workers’ time.⁵ Higher productivity should mean better economic growth and living standards, which in turn should boost returns across a wide range of industries.

Unlike the tech boom and bust endured at the turn of the century, in our view the present bull market reflects the industry's superior growth rate alongside profits and revenues, characteristics which were largely absent during the previous boom. The sector will naturally endure wobbles and markets are unlikely to hold their current pace, but we expect this secular trend to continue to be a powerful influence on markets and investors. Returns from US technology stocks have consistently outpaced those from the broader market and from more cyclical equity sectors. We expect that to continue as a secular trend.

ESG is here to stay

Sustainability has fallen out of focus over the past year, in part because of 2023’s difficult market backdrop but undoubtedly regulatory fatigue has also set in. But ultimately environmental, social and governance (ESG) considerations are part of a secular trend. Just look at the how the green bond sector has expanded in recent times – its value has risen by 500% in the last five years alone.

New technologies advancing decarbonisation and reducing biodiversity loss are being developed all the time – giving equity investors new business models to gain exposure to. Just like AI, going green is here to stay - it is, and will continue to be, one of the key investment themes of the age.

And it needs to be as global temperatures are still rising, climatic events are becoming more serious and natural habitats are deteriorating. The need to support and finance the transition to a more sustainable future is greater than ever and the investment opportunities are multiplying. The cost of renewable energy is falling – between 2010 and 2021, the global average cost of electricity generation for a renewable generator over its lifetime (including building and operating costs) fell by 88% for solar panels, and 68% and 60% for onshore and offshore wind respectively.⁶ One report forecasts that the cost of solar power will be cut in half and the cost of wind energy by a quarter by the end of this decade.⁷ Moreover, technology is addressing the challenge of reducing emissions in sectors such as steel making, chemicals and agriculture.

ESG no longer operates at the fringes, it is the mainstream. The world needs to adapt. Last year global clean energy spending surged 17% to a record $1.8trn according to BloombergNEF, including renewable energy installations, electric vehicles (EVs) and hydrogen production systems.⁸ But more than twice this amount is needed to reach net-zero targets by 2050 – this backdrop will provide huge investment opportunities.

• [1] Global Economy Set for Weakest Half-Decade Performance in 30 Years (worldbank.org)
• [2] FactSet
• [3] Home page - OECD
• [4] India could become the world’s 3rd largest economy in the next 5 years
• [5] Economic potential of generative AI | McKinsey
• [6] Why is cheap renewable electricity so expensive on the wholesale market? (parliament.uk)
• [7] The Energy Technology Revolution Will Drive Renewable Energy Prices Even Lower - CleanTechnica
• [8] China Leads Global Clean Energy Spending, Which Record $1.8 Trillion in 2023 - Bloomberg