With a potential debt default in the USA, what impact do you think it will have on the world economy and the global financial system?
We think there will be a resolution and that both parties are conscious of the negative consequences even the technical default would have. This would trigger major mayhem in the global system. It’s hard to predict because we’ve never been there. So we can’t take any precedent and extrapolate. It would be a serious shock and not worth it.
As we enter a post-pandemic era, what sectors and industries do you believe are particularly promising for investment, and why?
There’s a tactical aspect to it because we’re in the midst of going into the post-pandemic normal. We think 2024 will be the first year we can speak of the new normalcy and until then there are some cautious and some defensive sectors to be looked at. Healthcare for the time being seems to be a stable consumer franchise. However, big things are happening elsewhere as we speak that will be the main drivers of post-pandemic normalcy.
IT with the artificial intelligence breakthroughs is being discussed a lot and we suspect several big tech names to benefit from that. On top of that, there’s a major wave of investments coming into the energy infrastructure on a global scale. Be it the clean energy transition, engineering companies, utilities, and even insurance companies. All of them will benefit.
Considering the substantial growth in AI technology, how do you believe it will change the investment landscape for both investors and professionals working in the industry, over the coming years?
It will reshape the world as we know it and most likely change the way we look at and analyze markets. The firepower on the investor side will get a lot better in terms of pattern recognition, forensic bookkeeping, accounting and so forth. So the transparency will increase massively which will allow us to better assess investments going forward.
On top of that, it will be very interesting to see how the various industries are affected and I would compare it to the introduction of electricity or the computer into the Economy in the 1970s. This will affect almost everybody for the better. There will be lots of efficiency gains and the question of how much will those companies be able to keep with their margins and it’s really both a breakthrough in looking and investing in the market.
What about the conversation about AI technology coming into place and replacing certain jobs? Do you believe there are going to be more jobs created to replace the jobs that are going to be potentially replaced by AI?
I’m quite puzzled by the narrative. On the one hand, we’re having this huge discussion about replacing the baby boomer generation in many Western economies and a shortage of labour structurally. On the other hand, we have mass unemployment fantasies triggered by AI. I don’t believe that narrative is correct.
With the services sector which makes up 80% of the Western economy, a lot of lost human potential or capacity in the labour market will need to be replaced. There we’ll be able to witness massive AI breakthroughs, given the demographic situation of a lot of these economies.
So I wouldn’t paint it that black, but the process of getting there will create major hiccups, unrest, and uncertainty regarding the future.
Though the US dollar remains dominant in global forex reserves, there have been calls for trade to be carried out in currencies other than the US dollar. Do you see this trend accelerating over the next five years?
It is still too early to call for a replacement for the US dollar as the reserve currency. Rather, what we are witnessing is a diversification in both trade and central bank currency holdings. While the US dollar currently accounts for about two-thirds of the whole trade volume, this figure has slightly decreased, and central banks are increasingly diversifying their holdings.
However, if we examine the extent to which they have replaced US dollars with gold, other currencies, or a basket of currencies, we are only talking about a few percentage points. We do not anticipate a significant decrease in the use of the US dollar or its status as the primary currency in the US capital market. Therefore, we see this as more of a diversification trend rather than a de-dollarization in both trade and banking sectors.
In your view, do you still see gold as a safe haven? How has its role as a hedge altered in recent years?
I believe that gold’s value remains unchanged as it is one of the best options to protect against geopolitical shocks. From a micro risk perspective, we view treasuries as good protection, while gold offers elastic protection against spikes during certain crises and instability in the financial system. Gold has done an excellent job in this regard. We also see the value of gold as a signal of investor confidence in the stability of the current geopolitical and financial status quo. Over the past three years, we have seen gold fail to break the 2000 level three times, suggesting that the current world order and global financial system are likely to remain intact. While it may be a more costly option, it remains a valid diversification option for investors confronted with consistently devalued paper currency in many markets.
Oil has had its ups and downs in the last few months. How do you see the energy demand shifting in the coming months?
In the shorter term, the energy market is experiencing some contrarian trends that are difficult to predict. The current global economic slowdown, in terms of both growth and inflation, will likely put more pressure on energy prices in the short and intermediate term. However, we believe that the ongoing energy transition will have a significant impact over the next five to 10 years. Despite this, the traditional oil industry has shifted towards a repayment system where shareholders receive most of the cash flow through dividends and buybacks. This bodes well for supply discipline and cash flows, and we do not believe it signals the end of fossil fuels. Therefore, we expect some weakness due to cyclical and logical factors, but we anticipate stabilisation in the mid-seventies to eighties range for the crude oil price in the long term.
What are the key risk factors you foresee for the next five years?
I’ve been in this industry for over 30 years and I can’t recall a time when there has been such a focus on risk. In recent times, the major risk is geopolitical and I don’t believe that conflict will disappear anytime soon. Rather, the multi-polarities are in a state of flux, which makes it difficult for investors to predict the next move in this geopolitical landscape. There is also a concern about debt levels in many economies. If interest rates remain high, there may be discussions around government debt levels. The housing bubbles in the West have caused consumers to deleverage massively, but corporates are disciplined. Unfortunately, the government, particularly in the US and Europe, is now confronting debt levels that are unsustainable given current interest rates. Therefore, the biggest risks to financial stability in the next five to 10 years are geopolitical instability and government debt levels.
When we spoke a year ago, we briefly touched on crypto. What are your opinions on Bitcoin currently?
I don’t have a specific tactical recommendation for this particular currency or digital gold, but I do believe that blockchain technology will revolutionise the way we run our economic system. The ongoing Bitcoin discussion and its evolution give us a glimpse into where this technology is leading us. While I’m not convinced that it will entirely replace traditional money, it gives us an idea of what to expect from blockchain and its applications in the real economy.