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Navigating 2023: A Financial Odyssey Through Tech, AI, and Economic Recovery

By Brian RushmereArticle originally posted here.

In the ever-evolving landscape of global finance, the year 2023 unfolded with a series of events that sent ripples across various sectors, reshaping the dynamics of investment and market performance.

There were some surprises, some lows and many lessons learnt as we took stock of what transpired in the markets.

Here we unpack the five most impactful moments:

Microsoft invests in OpenAI

One of the standout narratives was Microsoft’s substantial $10 billion (R187bn) investment in artificial intelligence (AI) research organisation OpenAI, the company behind ChatGPT. The move positioned AI at the forefront of investors’ minds and renewed focus on the “Magnificent 7”, comprising Apple, Microsoft, Tesla, Amazon, Meta (Facebook), Alphabet (Google), and Nvidia, as the dominant players shaping the S&P 500’s performance.

Investors worldwide, including those in South Africa, recognised the potential of AI and sought exposure to the technological advancements in the US. There are, of course, questions about the sustainability of AI. The technology itself, while holding much potential, is in its infancy. However, it is capturing investors’ imaginations as most people at the forefront of technology recognise the importance of it.

While there’s fears of AI taking away jobs, it’s also bound to create them. All eyes were recently on the UK, which saw a £2.5bn (R59bn) investment into the economy from Microsoft in a bid to create the next “Silicon Valley” and drive the growth of AI. The investment, which will be made over the next three years, is set to go towards infrastructure and provide more than a million people with AI skills.

The Silicon Valley Bank Collapse

Contrastingly, the Silicon Valley Bank (SVB) Collapse in March brought forth a cautionary tale. As the tech sector slowed down, higher interest rates diminished the value of assets, particularly US government bonds to which SVB was exposed to as well. This, unsurprisingly, resulted in the unfolding of the second-largest bank failure in US history.

Once the news broke that SVB had to write down huge losses, it created a stampede. The rapid bank run, which took 48 hours, underscored the vulnerability of financial institutions to market fluctuations, prompting intervention from the US government.

SVB was the first casualty in an environment of fast rising interest rates. From an investor point of view, this event showed the risks of lending to tech companies and being overexposed to one asset class.

People started to get worried about whether there was a contagion in other financial markets. However, other banks had more diversified balance sheets and there were only minor collapses that followed. However, SVB’s demise emphasised the need for diversified portfolios and vigilant risk management.

Nirvana over Nvidia

In May, Nvidia’s financial results propelled the tech giants into the limelight once again. The surge in demand for computer chips, essential for AI products, fuelled optimism for the sector.

The financial success of Nvidia highlighted the symbiotic relationship between cutting-edge technology and the semiconductor industry. It reinforced the notion that the future of AI was intricately tied to the capabilities of hardware components and their respective manufacturers’ ability to cater to the demand.

The AI chips are made by only a handful of companies and, for now, Nvidia is a leader. It’s a fast-moving area of investment and AI providers only want the best products in the market.

Fitch Downgrading the US

A significant shift occurred in August when Fitch downgraded the US credit rating from AAA to AA+. While the downgrade had a limited immediate impact, it raised concerns about the country’s fiscal outlook and political gridlock.

The move, symbolic in nature, marked a deviation from the historical dominance of the US in the credit market. While the chances of a US default are low, it made investors nervy. Our view is that this will not have a major negative impact in the long run. In fact, it’s still a good environment for those engaged in offshore investing because the US economy – relative to other developed markets – is doing rather well.

US Resilience

In the third quarter, the US economy displayed resilience, with a robust 4.9% expansion defying expectations and shrugging off Fed hikes. The growth was mainly powered by consumer spending. The average person is spending a high amount of their wage and it’s a highly active market – one of the most engaged in the world.

Households are spending their own money as well as borrowed money. However, we believe in the Fed’s ability to manage this situation through prudent fiscal and monetary policies. While rates are peaking, the Fed will continuously monitor the situation and react if necessary and this is what could give investors more comfort.

Outlook for 2024

The year 2023 unfolded as a tale of contrasting narratives—of technological advancement, financial instability, and a surprising show of US economic resilience despite rate hikes and a downgrade. The interplay between AI, tech giants, economic indicators and global events highlights the complexity of modern financial ecosystems.

Looking ahead to 2024, concerns about a potential economic slowdown and recession loom. The Magnificent 7’s distortion of the S&P 500’s performance raises questions about the sustainability of the current trajectory.

The anticipation of a slowdown is not without its silver lining, as many expect a soft landing, particularly in the US. Recessions are a common occurrence during investment cycles so it’s important that investors keep their reserve and remain focused on their investment goals.

We believe a diversified global multi-asset strategy is a prudent approach to navigate the uncertainties. This, along with informed decision-making, becomes imperative in the pursuit of long-term financial prosperity.

*Rushmere, CFA is an investment analyst from Levantine & Co, a specialist offshore wealth management firm.

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