Climbing the wall of worries

No less than nine major equity indices have reached their all-time high during the month of February 2024: the S&P 500, the Nasdaq 100, the Dow Jones, the DAX, the CAC, the Swedish OMX, the Dutch AEX, the Japanese Topix, and, at last, its Nikkei sibling, more than 34 years after its 1989 prior peak.

This goes in line with our long-term conviction that we’re living in a secular bull market, that started in 2013 when the MSCI World bettered its 2007 high; this secular bull market is driven by Digitalization on the one hand, and Energy Revolution on the other hand.

Digitalization effectively started in 2007 when the first Iphone was disclosed; it has completely transformed corporate and personal habits. This phenomenon got a spectacular boost last year with the craze around Artificial Intelligence and the cohort of consequences related to it (cyber security, semiconductors, data centres among others), notwithstanding the still unknown effects it will have on productivity and employment.

The Energy Revolution has a more top-down genesis, as it is, for the time being, mostly driven by regulations. All habits will, here again, gradually change over the years to come, whether production processes, transportation, housing, global trade, power generation, and the list goes on. It is by the way interesting to note that, due to the unstoppable expansion of data centres, estimations point to an immense increase in electricity demand to respond to this expansion, at a time when power generation has to get cleaner. This is not the only spot where Digitalization and Energy Efficiency meet.

For both these long-term investment cycles, the end is clearly far from nigh; massive capex will be required to satisfy both Digitalization and Energy Efficiency needs, so we can say that the major drivers of the secular bull market we’re living in are here to stay, providing equities with a sustainable tailwind.

This is not the first time such a situation occurs: during the last century, global equities have experienced three similar secular bull markets, each time supported by massive investment cycles:

• 1915-1929, the Steel bull market driven by urbanization, railroads, industrialization, automobile, and armies’ mechanization.
• 1954-1972: the discovery of marketing on the one hand and mass consumption following WWII on the other hand, gave birth to a formidable bull market with both the corporate world (through advertising, communication, and marketing) and households (buying cars, TVs, radios, hair dryers, dishwashers and other things) embarking into high levels of investments.
• 1982-2000: an incredible bull market, before it was a bubble, where Telecommunications, Media and Technology found, here also, households and companies investing enormous amounts of money, in hardware notably (PCs, new technology TVs and media in general, mobile phones, internet access, and the list goes on).

A secular bull market does not consist in seeing markets rise whatever happens; there are accidents, sometimes severe. During the aforementioned periods, markets have experienced painful drawdowns, like in 1966, 1970, 1987, 1991, 1997, 2018 or 2020, just to cite a few.

But the main characteristic of the secular bull markets is that markets come back to their highs quite rapidly after said corrections, in a 12 to 24 months timeframe most of the times. Recent market conditions have demonstrated this: 2018, 2020, 2022 were difficult, not to say frightening; but this did not prevent equities to climb the wall of worries to extend their advances, because the investment cycle did not come to a halt. Companies and households have continued to invest and spend in Digitalization and Energy Efficiency, and the companies benefitting from these investments kept on thriving, and it’s far from over.

Having said that, it would be necessary, for the sake of this bull market, to see a genuinely broader participation to the upside; global equities performances, for the last 15 to 18 months, have been extremely polarized and many stocks have nor really participated. Capital expenditures must lead to increased productivity and more efficient processes, as well as reduced costs. Both digitalization and energy efficiency should lead to this and help all sectors improve profitability; this is all the most important for this bull market to stay alive.

This should make investors constructive about the fate of global equities, even though there’s no doubt accidents will happen down the road. At some point, but we’re far from there yet, valuations and/or competition and prices will ring the death knell of the secular bull market we enjoy, but, until then, well diversified equities should represent a significant portion of long-term investors’ portfolios.