Volatility isn’t new: it’s normal – mid-year outlook

In my years as a professional investor, it feels like periods of benign calm have been few and far between. The current bout of political upheaval, wars and wild market swings is certainly not among them. Part of the reason it feels that way is because we tend to remember these times of tumult and volatility far more clearly than we recall the ‘ordinary’ years.

In fact, we only need to look back as recently as the 2010s to find a time that, with hindsight, was an era of relative calm. It was a decade that perhaps lulled many investors into a false sense of security. Of course, there were notable market and corporate events in which investors lost money. But on the whole markets trended upward, politics were relatively steady, and economic shocks were rare.

What we can now see is that 2010s were the exception, not the rule. The 2000s, by contrast, were marked by major events such as the dot.com bust, 9/11, and the Global Financial Crisis. What we’re currently experiencing – a return to more frequent and sharper market movements – is arguably a reversion to normality.

Reasons to be cheerful

While volatility and geopolitical tensions might dominate the macroeconomic narrative, there are actually more powerful, but less noticeable forces shaping the future. Going back to the 2000s, this may have been a turbulent decade, but micro-level innovations emerged that had a more tangible long-term impact. For example, few would have predicted the profound effect the iPhone would have on our lives when it launched in 2007. It ended up having a more significant and lasting impact than the global financial crisis, which was occupying the minds of most investors that year.

The 2000s was also the decade in which the internet really came into its own and started reshaping every aspect of our lives. In a famous interview in 1999, Jeremy Paxman showed scepticism towards David Bowie’s view that the internet would change our world forever.  Viewed through the lens of history we can see Bowie was right. And it seems like we are at a similar inflexion point now with Artificial Intelligence. 

AI is already reshaping industries, and its potential is staggering, but just as we were using the internet to watch funny cat videos in ’99, we are still really only playing around with AI’s potential.

AI is already reshaping industries, and its potential is staggering, but just as we were using the internet to watch funny cat videos in ’99, we are still really only playing around with AI’s potential. As adoption accelerates, it could drive productivity gains across the economy, much like the internet did. Some experts believe AI’s impact could be many times that of the internet. True, he may have a vested interest, but Sundar Pichai, CEO of Alphabet and Google claims “AI is one of the most important things humanity is working on. It is more profound than electricity or fire.”

It’s also important to remember that the digital revolution requires a robust physical foundation. From data centres to resilient power grids, infrastructure investment is booming. This is being driven by trends like reindustrialisation, decarbonisation, and the need for digital connectivity. It’s the type of companies providing these services, which often operate away from the limelight and therefore have more sensible valuations, that could provide some of the best investment opportunities in the longer term.

It’s not just the technology sector that could produce to the kind of productivity shifts that boost global growth.

There are developments in healthcare, particularly in obesity drugs, which may have far-reaching implications. Improvements in the health of individuals could lead to major savings within public health systems, while a healthier slimline labour force could also enhance economic productivity.

Global growth is broadening

Another reason for optimism is the shifting landscape of global growth. For the first time in years, regions like Europe and China are taking more proactive roles in stimulating their economies. Europe is moving away from its traditional austerity mindset, while China is stepping up efforts to stabilise growth. Together, these regions represent a larger economic bloc than the US, offering a potential counterbalance to any slowdown in American growth.

This diversification of economic drivers could lead to a more balanced global economy – one where investors don’t have to rely solely on the US for returns.

Micro trumps macro

Much of today’s political instability stems from a broader dissatisfaction with how the benefits of globalisation have been distributed. Over the past decade, asset owners have seen their wealth grow, while real wage growth for many workers has stagnated. This imbalance has fuelled populist movements across the globe.

These political shifts are symptoms of a deeper issue: a sense among many that the economic system no longer works for them. While this discontent is real and must be acknowledged, it’s also important to recognise that political cycles are, by nature, temporary.

And just as happened in the 2000s, I think it is the gains from as-yet unknown micro developments that are likely to deliver the growth we need to prosper and return to a more stable world. The trends I’ve mentioned are not only investable, they’re also long-lasting. Unlike political leaders, who come and go, the impact of these innovations will be felt for decades.

It’s also important to remember that despite the all the alarming newsflow, corporate earnings have remained surprisingly stable. This resilience is a key reason why equity markets have held up better than many anticipated. The US market is flat on the year, while Europe and Asia have posted gains. This suggests that investors are recognising the strength of the corporate sector, even amid macro uncertainty.

And if I’m wrong to be so optimistic and the world does end? Then our equity allocations are going to be the least of our concerns.   

For professional investors only. This material is not suitable for a retail audience. Capital at risk. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.  Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.