The techno kings of Silicon Valley have a tenet: every passing year brings us closer to the singularity, to the point where artificial intelligence (AI) takes control and humans take a backseat.
When AI becomes sentient and omniscient, the computers dominate and everything will change. Whether that will be for the better or worse depends on your temperament and faith in the programmers.
Some say this point is less than a decade away, yet I’m not so sure. The robots have long been meddling in investment markets and they can’t seem to hold more than one issue or event in focus at any one time. If anything, this myopia has been getting worse in the past couple of years as AI and computing technology has ramped up.
A rapid and substantial cut to interest rates in 2024 also seems unlikely without a deep and sustained recession
Each day seems to begin anew, with little consideration given to what happened even in the very near past. This has led to some startling shifts in asset prices and violent rotations as investors constantly reassess what sort of assets they think will do best in the ever-changing future. Not only in stocks and corporate debt, either. Government bond volatility has been truly shocking.
The big driver of the government bond rollercoaster is uncertainty about the future path of interest rates. As data points drip into the market and central bankers murmur sweet nothings to monetary policy conferences, bond prices lurch up and down. The 10-year US treasury yield has swung from 4% to 5% and back to 4.3% in the space of a few months.
These are huge moves. And I would argue they aren’t justified by any incremental change in economic data. US inflation has, broadly, fallen back to a band just above the 2% target where it will no doubt stick until America slips into a recession.
Like the government bond market, that’s yet another spicy round trip that brings more than a few grey hairs
There are signs of approaching weakness, in consumer spending and rising loan defaults, so a full-throated resurgence of inflation seems unlikely. Yet a rapid and substantial cut to interest rates in 2024 also seems unlikely without a deep and sustained recession, something that is belied by the nation’s current economic strength.
Because of this, our approach has been to build positions in longer-dated bonds when yields rise. At 4.5% and higher, we think they really look great value on a medium-term view and even better if economies tip into recession. But it will remain a rough ride as long as knee-jerk reactions to the datapoint of the day is the norm.
Another big, myopic flip-flopping focus last year was the reaction to the next-generation weight loss drugs.
The pharmaceutical businesses sporting them, Novo Nordisk and Eli Lilly, became the ‘Dynamic Duo’ (we don’t own either of these). The stock prices ballooned, taking the market cap of Novo from $270bn at the beginning of the year to $455bn today.
This myopic market creates substantial volatility, which can be difficult to manage, but it also brings a greater range of prices to hit when trading
In the same time, Eli’s market cap has soared more than 65% to $555bn – the GDP of Norway is the same size (if you excuse us comparing apples with bananas to show the scale; a market cap is a value at a point in time, whereas GDP is a flow of goods and services for each year).
According to FactSet, estimated price-earnings multiples for Novo and Eli are 31x and 49x respectively. For context, less-hyped pharmaceutical Roche is 13x (which we do own) and its counterpart GSK is 9x.
Meanwhile, investors fixated on the impact to all society of these drugs. The effects were extrapolated to everything from the food industry and clothing retailers to healthcare. You would think the Big Mac will go the way of the dinosaurs, Coke the way of Tizer, and pizzas doomed like Findus crispy pancakes.
The assumptions are once again heroic: diabetes will be eradicated (if only), no one will need a knee replacement because everyone would weigh five stone (31kg for those under 30) and clinical testing demand will fall off a cliff as the end of obesity means the incidence of related diseases or illnesses collapses.
Each day seems to begin anew, with little consideration given to what happened even in the very near past
Share prices plummeted: Dexcom (diabetes) from $140 to $80, Coca-Cola $60 to $52 and McDonald’s $300 to $250 (we own all these stocks). However, in just a couple of months it was almost like it never happened, with those stocks trading back in their pre-plunge ranges.
Like the government bond market, that’s yet another spicy round trip that brings more than a few grey hairs. But also the chance to buy at a large and fleeting discount – something we grabbed with both hands.
Earlier this year, the market fixation was AI hype itself: the ‘Magnificent Seven’ and the rise of the machines, culminating in a bro chat between techno king Elon Musk and UK prime minister Rishi Sunak that was beyond cringe.
How did we get to this? For months it was the only narrative playing out, the assumptions of which – however you looked at them – were ridiculous. Fortunately, we hold five of the seven in most of our multi-asset portfolio funds, so we benefited from this. Conversely, these soaring prices offered us the chance to take profits as share prices pushed well past our estimate of their fair value.
Again, this myopic market creates substantial volatility for portfolios, which can be difficult to manage, but it also brings a greater range of prices to hit when trading. If this is the singularity, bring it on.
David Coombs is lead fund manager on the Rathbone multi-asset portfolios
