At Newton, we harness our multidimensional research capabilities to investigate key long-term trends that we believe will be instrumental in shaping the investment landscape over the coming years. Since 2022, the topic of artificial intelligence (AI) has never been far from the headlines, generating both huge excitement and deep concern.

AI is set to expand to new areas and enable significant advancements by creating user-friendly connections between people and advanced tech, with productivity and value creation set to skyrocket across industries. AI has the potential to change everything consumers touch, as technology and functionality continue to converge. AI application has broadened considerably in 2024; we expect this to continue into 2025 and beyond. AI looks set to transform essentially everything we touch, from our personal devices, work devices, cars and homes. The technology will continue to evolve as AI agents (software applications capable of running tasks on their own) extend their capabilities from assistance to action.

The modern software and data ‘stack’ is poised to change. Winning technology companies are likely to be vertically integrated, which will tend to favour large caps over small caps. Scale in computing by leveraging the cloud will also be compounded by companies that have the resources to deliver processing close to customers. Moving more resources to the edge, or even into the hands of users through local devices, can shape new winners in the next phase of the AI theme.

AI is also spreading beyond the technology sector as the second-order impacts are beginning to be felt in areas such as infrastructure, utilities, industrials, and nuclear power. 

Not to be outdone by the private sector, government engagement in AI is poised to create a second wave of AI progress. Nations are starting to see both the benefits and risks of AI, understanding its impact on economic growth and national security. Consequently, more countries are developing their own AI infrastructure and capabilities to boost competitiveness and ensure future security.

Evolving AI use cases: agents, real-time language translation, education

AI is breaking out of its limited scope of assistance to engage more and more of the world through action.

Large language models (LLMs) have opened up a new frontier for AI to assist with productivity, including potentially replacing manual jobs that have a high propensity for errors. Large action models (LAMs) will take the baton from LLMs and keep the momentum going for AI into 2025. LAMs combine the language of LLMs with the ability to make decisions autonomously. They are also used in creating agents. LAMs can understand human intentions and can be trained for specific tasks using specific applications.

Over the next decade, we may see the rise of entire agent ecosystems—vast networks of interconnected AI that will push enterprises to think about their intelligence and automation strategy in a fundamentally different way.

An AI agent interacts with its environment, gathers data, and uses it to carry out self-chosen tasks to reach set objectives. Humans set the goals, but the AI agent independently selects the best actions to achieve them.

Agents are possible owing to the many innovations and advancements across technology, including a significant increase in data to analyse, driven in part by an increasing number of connected devices from the internet of things, exponential data growth from generative AI, and progress in algorithms. Together with increased processing capacity on smaller chips that reduces latency for real-time AI, this all leads to improved response times and reliability.

Agent applications

Education is an area of significant opportunity for AI agents to break down barriers and democratise education globally, helping to customise education to the student based on their needs and progress. Using a machine-learning foundation, agents can analyse visual, auditory, reading/writing and kinaesthetic learning patterns. They can decipher strengths and weaknesses and create customised curricula.

Another major advancement in AI is real-time language translation. Language is a significant barrier to learning and social interaction. Among the first applications of AI on mobile devices will be to break down linguistic barriers through real-time LLMs. Devices have the potential to become more intelligent, learning our patterns, routines, interactions and reactions to interactions, and will become platforms to enhance all aspects of our lives. Essentially, we could all have a supercomputer in our hand, in our ears, on our wrist, or as our eyes.

Broader agent themes

With more agents on our devices, we may also see an evolution from a graphical user interface (GUI) to a conversational user interface (CUI), which uses voice prompts to engage with LLMs and LAMs. Agents driven by LAMs embedded in our devices can act in real time by communicating with other LAMs and engaging with external systems (such as apps), making AI more functional for the general population.

In some form, agents will also be on our work computers, changing the way we interact with our computer by performing a myriad of tasks. The current limitations are around what we tell them to do. Over time, the capabilities will evolve and expand through machine and deep-learning techniques, and agents will interact with each other to make higher-level decisions and take more intuitive actions.

Having AI on devices, coupled with the rollout of 5G mobile networks and a proliferation of sensors, should drive growth in the ‘internet of things’ (connected devices), and enable more real-time data analysis and decision-making to take place at the ‘edge’ (i.e., in real time even at remote locations). We expect significant improvement in, for example, autonomous driving capabilities, and these developments also open the door for progress within health care, with better monitoring, treatment and detection. The advancements in safety and privacy alone should be noticeable.

We can envision a future in which everyday devices are transformed. We will also see many failures, and some will come to market before the ideal infrastructure and technology are ready. The possibility exists for one device with built-in internet access, driven by LLMs, LAMs and agents, which sees everything you see, hears everything you hear, and becomes your personal assistant and life coach. It could include biosensors to sense your mood, biometrics to measure your health, and facial recognition to tell you who people are (for those of us who are not good at remembering names).

Impact on power/electricity

The power sector has hit an inflection point, which has been driven by electrification, deglobalisation, and now the demand for and growth of AI. Throughout 2024, we have seen continued strength in the technology sector, but utilities have led the market. AI is providing an additional tailwind to the power market beyond the themes that were already in place.

The International Energy Agency’s (IEA) recently released Electricity 2024 report¹ highlights:

• Global electricity demand is set to grow at a 3.4% compound annual growth rate (CAGR) from 2024-2026 compared to 2.2% and 2.4% in the prior two years.
• Electricity consumption from data centres, AI and cryptocurrency sectors could double from 460 terawatt hours (TWh) in 2022 to potentially 1,050 TWh in 2026.
• Global nuclear generation is set to grow 3% per year on average through 2026, surpassing the previous generation record last set in 2021.

Data centres, AI and cryptocurrency already represent almost 2% of total global electricity demand, according to the report. This number could double to 4% in 2026 as data centres increase electricity devoted to computing and cooling. The US consumes the most energy, with its 33% of global data centres representing 4% of all US electricity demand, growing to 6% in 2026, while China and the European Union (EU) are forecast to grow their data-centre electricity consumption by 50% by 2026. Ireland’s data centres represent a whopping 17% of total electricity consumed in the country, which is forecast to increase to 32% over this time frame. 

Estimated data centre electricity consumption and its share in total electricity demand in selected regions in 2022 and 2026

Source: International Energy Agency, Electricity 2024.

Given the global race for computing power, we expect this trend to continue well beyond 2025, creating second-order impacts in the AI ecosystem across areas such as energy, infrastructure, utilities and nuclear power. China recently communicated its desire to almost double its computing power by 2025, believing that, historically, every one yuan invested in computing power has driven three to four yuan of economic output.

The US CHIPS Act of 2022 provides $52 billion in manufacturing grants and subsidies along with a 25% investment tax credit to incentivise semiconductor manufacturing in the US, with the aim of increasing market share through revitalising US semiconductor manufacturing, strengthening the supply chain, and advancing national security. The EU passed its own European Chips Act in 2023 aimed at doubling Europe’s share of the global microchips market, with more than €43 billion of policy-driven investment to support the legislation until 2030, which is intended to be broadly matched by long-term private investment.

This global chip war and considerable government support should provide long-term tailwinds for the second-order effects of AI growth mentioned above. Nuclear power is one area of significant opportunity. The IEA’s updated Net Zero Roadmap estimates nuclear energy could more than double by 2050. Nuclear momentum really started to build at the COP28 climate change conference in December 2023, with over 22 countries aiming to triple nuclear capacity by 2050. 

Sovereign AI

As the pivotal role of AI in our future becomes increasingly evident, states are preparing themselves against disruption by building their own AI algorithms and industries. Governments around the globe are ramping up their investment to enable the wide array of use cases, including the bolstering of critical areas of health care, energy and defence. Combined with the prospect of new forms of cyber risk from AI, increased regulatory scrutiny (e.g., the EU’s General Data Protection Regulation) is also a driving force in data-centre construction across the globe. The EU, for example, wants data centres close at hand to tighten compliance and security. We should expect regulatory scrutiny to continue and cannot rule out the prospect of additional fines or frameworks to control risk, though such measures could have the unintended risk of stifling innovation and further entrenching today’s incumbents. In Asia, Chinese companies may be expanding data-centre computing resources beyond the Chinese mainland owing to rising export restrictions by the West. These activities are likely to expand and diversify the growth of AI beyond today’s private-sector hyperscalers.

Conclusion

We are at a point of reinvention. Businesses will soon have powerful technologies that will boost human potential, productivity and creativity. Early adopters are leading the way into a new era where technology, ironically, is becoming more human.

Generative AI and transformer models have revolutionised technology, from chatbots like ChatGPT to more accessible, intelligent systems. While AI initially focused on automation, it is now enhancing our work, democratising technology, and making specialised knowledge more widely available. This shift is transforming organisations and markets, bridging gaps between humans and technology, and unlocking greater human potential.

AI may deliver financial impact through productivity, cost reduction and new sources of revenue. We expect the first two of those levers, productivity and cost savings, to drive margins higher as AI expands. AI may also be a source of deflation. Revenues may follow once enterprises see tangible internal successes and launch new products and services with integrated AI capabilities.

¹Electricity 2024: Analysis and forecast to 2026, International Energy Agency.

At Newton, we harness our multidimensional research capabilities to investigate key long-term trends that we believe will be instrumental in shaping the investment landscape over the coming years. Since 2022, the topic of artificial intelligence (AI) has never been far from the headlines, generating both huge excitement and deep concern.

AI is set to expand to new areas and enable significant advancements by creating user-friendly connections between people and advanced tech, with productivity and value creation set to skyrocket across industries. AI has the potential to change everything consumers touch, as technology and functionality continue to converge. AI application has broadened considerably in 2024; we expect this to continue into 2025 and beyond. AI looks set to transform essentially everything we touch, from our personal devices, work devices, cars and homes. The technology will continue to evolve as AI agents (software applications capable of running tasks on their own) extend their capabilities from assistance to action.

The modern software and data ‘stack’ is poised to change. Winning technology companies are likely to be vertically integrated, which will tend to favor large caps over small caps. Scale in computing by leveraging the cloud will also be compounded by companies that have the resources to deliver processing close to customers. Moving more resources to the edge, or even into the hands of users through local devices, can shape new winners in the next phase of the AI theme.

AI is also spreading beyond the technology sector as the second-order impacts are beginning to be felt in areas such as infrastructure, utilities, industrials, and nuclear power. 

Not to be outdone by the private sector, government engagement in AI is poised to create a second wave of AI progress. Nations are starting to see both the benefits and risks of AI, understanding its impact on economic growth and national security. Consequently, more countries are developing their own AI infrastructure and capabilities to boost competitiveness and ensure future security.

Evolving AI Use Cases: Agents, Real-Time Language Translation, Education

AI is breaking out of its limited scope of assistance to engage more and more of the world through action.

Large language models (LLMs) have opened up a new frontier for AI to assist with productivity, including potentially replacing manual jobs that have a high propensity for errors. Large action models (LAMs) will take the baton from LLMs and keep the momentum going for AI into 2025. LAMs combine the language of LLMs with the ability to make decisions autonomously. They are also used in creating agents. LAMs can understand human intentions and can be trained for specific tasks using specific applications.

Over the next decade, we may see the rise of entire agent ecosystems—large networks of interconnected AI that will push enterprises to think about their intelligence and automation strategy in a fundamentally different way.

An AI agent interacts with its environment, gathers data, and uses it to carry out self-chosen tasks to reach set objectives. Humans set the goals, but the AI agent independently selects the best actions to achieve them.

Agents are possible owing to the many innovations and advancements across technology, including a significant increase in data to analyze, driven in part by an increasing number of connected devices from the internet of things, exponential data growth from generative AI, and progress in algorithms. Together with increased processing capacity on smaller chips that reduces latency for real-time AI, this all leads to improved response times and reliability.

Agent Applications

Education is an area of significant opportunity for AI agents to break down barriers and democratize education globally, helping to customize education to the student based on their needs and progress. Using a machine-learning foundation, agents can analyze visual, auditory, reading/writing and kinesthetic learning patterns. They can decipher strengths and weaknesses and create customized curricula.

Another major advancement in AI is real-time language translation. Language is a significant barrier to learning and social interaction. Among the first applications of AI on mobile devices will be to break down linguistic barriers through real-time LLMs. Devices have the potential to become more intelligent, learning our patterns, routines, interactions and reactions to interactions, and will become platforms to enhance all aspects of our lives. Essentially, we could all have a supercomputer in our hand, in our ears, on our wrist, or as our eyes.

Broader Agent Themes

With more agents on our devices, we may also see an evolution from a graphical user interface (GUI) to a conversational user interface (CUI), which uses voice prompts to engage with LLMs and LAMs. Agents driven by LAMs embedded in our devices can act in real time by communicating with other LAMs and engaging with external systems (such as apps), making AI more functional for the general population.

In some form, agents will also be on our work computers, changing the way we interact with our computer by performing a myriad of tasks. The current limitations are around what we tell them to do. Over time, the capabilities will evolve and expand through machine and deep-learning techniques, and agents will interact with each other to make higher-level decisions and take more intuitive actions.

Having AI on devices, coupled with the rollout of 5G mobile networks and a proliferation of sensors, should drive growth in the ‘internet of things’ (connected devices), and enable more real-time data analysis and decision-making to take place at the ‘edge’ (i.e. in real time even at remote locations). We expect significant improvement in, for example, autonomous driving capabilities, and these developments also open the door for progress within health care, with better monitoring, treatment and detection. The advancements in safety and privacy alone should be noticeable.

We can envision a future in which everyday devices are transformed. We will also see many failures, and some will come to market before the ideal infrastructure and technology are ready. The possibility exists for one device with built-in internet access, driven by LLMs, LAMs and agents, which sees everything you see, hears everything you hear, and becomes your personal assistant and life coach. It could include biosensors to sense your mood, biometrics to measure your health, and facial recognition to tell you who people are (for those of us who are not good at remembering names).

Impact on Power/Electricity

The power sector has hit an inflection point, which has been driven by electrification, deglobalization, and now the demand for and growth of AI. Throughout 2024, we have seen continued strength in the technology sector, but utilities have led the market. AI is providing an additional tailwind to the power market beyond the themes that were already in place.

The International Energy Agency’s (IEA) recently released Electricity 2024 report¹ highlights:

• Global electricity demand is set to grow at a 3.4% compound annual growth rate (CAGR) from 2024-2026 compared to 2.2% and 2.4% in the prior two years.
• Electricity consumption from data centers, AI and cryptocurrency sectors could double from 460 terawatt hours (TWh) in 2022 to potentially 1,050 TWh in 2026.
• Global nuclear generation is set to grow 3% per year on average through 2026, surpassing the previous generation record last set in 2021.

Data centers, AI and cryptocurrency already represent almost 2% of total global electricity demand, according to the report. This number could double to 4% in 2026 as data centers increase electricity devoted to computing and cooling. The US consumes the most energy, with its 33% of global data centers representing 4% of all US electricity demand, growing to 6% in 2026, while China and the European Union (EU) are forecast to grow their data-center electricity consumption by 50% by 2026. Ireland’s data centers represent a whopping 17% of total electricity consumed in the country, which is forecast to increase to 32% over this time frame. 

Estimated Data Center Electricity Consumption and its Share in Total Electricity Demand in Selected Regions in 2022 and 2026

Source: International Energy Agency, Electricity 2024.

Given the global race for computing power, we expect this trend to continue well beyond 2025, creating second-order impacts in the AI ecosystem across areas such as energy, infrastructure, utilities and nuclear power. China recently communicated its desire to almost double its computing power by 2025, believing that, historically, every one yuan invested in computing power has driven three to four yuan of economic output.

The US CHIPS Act of 2022 provides $52 billion in manufacturing grants and subsidies along with a 25% investment tax credit to incentivize semiconductor manufacturing in the US, with the aim of increasing market share through revitalizing US semiconductor manufacturing, strengthening the supply chain, and advancing national security. The EU passed its own European Chips Act in 2023 aimed at doubling Europe’s share of the global microchips market, with more than €43 billion ($46 billion) of policy-driven investment to support the legislation until 2030, which is intended to be broadly matched by long-term private investment.

This global chip war and considerable government support should provide long-term tailwinds for the second-order effects of AI growth mentioned above. Nuclear power is one area of significant opportunity. The IEA’s updated Net Zero Roadmap estimates nuclear energy could more than double by 2050. Nuclear momentum really started to build at the COP28 climate change conference in December 2023, with over 22 countries aiming to triple nuclear capacity by 2050. 

Sovereign AI

As the pivotal role of AI in our future becomes increasingly evident, states are preparing themselves against disruption by building their own AI algorithms and industries. Governments around the globe are ramping up their investment to enable the wide array of use cases, including the bolstering of critical areas of health care, energy and defense. Combined with the prospect of new forms of cyber risk from AI, increased regulatory scrutiny (e.g., the EU’s General Data Protection Regulation) is also a driving force in data-center construction across the globe. The EU, for example, wants data centers close at hand to tighten compliance and security. We should expect regulatory scrutiny to continue and cannot rule out the prospect of additional fines or frameworks to control risk, though such measures could have the unintended risk of stifling innovation and further entrenching today’s incumbents. In Asia, Chinese companies may be expanding data-center computing resources beyond the Chinese mainland owing to rising export restrictions by the West. These activities are likely to expand and diversify the growth of AI beyond today’s private-sector hyperscalers.

Conclusion

We are at a point of reinvention. Businesses will soon have powerful technologies that will boost human potential, productivity and creativity. Early adopters are leading the way into a new era where technology, ironically, is becoming more human.

Generative AI and transformer models have revolutionized technology, from chatbots like ChatGPT to more accessible, intelligent systems. While AI initially focused on automation, it is now enhancing our work, democratizing technology, and making specialized knowledge more widely available. This shift is transforming organizations and markets, bridging gaps between humans and technology, and unlocking greater human potential.

AI may deliver financial impact through productivity, cost reduction and new sources of revenue. We expect the first two of those levers, productivity and cost savings, to drive margins higher as AI expands. AI may also be a source of deflation. Revenues may follow once enterprises see tangible internal successes and launch new products and services with integrated AI capabilities.

¹Electricity 2024: Analysis and forecast to 2026, International Energy Agency.

Key Points

• The investment theme of digital transformation presents a diverse landscape of investment opportunities.
• A key element of digital transformation that is gaining momentum is real-time pricing, in which businesses adjust their pricing dynamically in ever-shorter intervals.
• Implementing real-time pricing requires an advanced data infrastructure and systems capable of rapid data processing to facilitate immediate pricing updates.
• Real-time pricing is transforming the advertising, utilities and transportation industries.

Thematic research is one of the key inputs available to Newton’s active-equity investment approach. Our research seeks to identify and assess new themes, and it considers the duration of existing themes and evaluates how they progress and relate to one another.

Digital transformation is a theme that resides at the intersection of the internet of things, big data, cloud computing and artificial intelligence. An intriguing segment of digital transformation currently gaining momentum is the growing adoption of real-time pricing. While various methods of dynamic pricing have been used for most of human history, real-time pricing takes this further by allowing businesses to adjust prices in shorter intervals and employ a growing number of market inputs.

What Does it Take to Get Real

Whether used for e-commerce, ride sharing, advertisement pricing or any other of its many use cases, implementing real-time pricing at scale requires several enabling technologies. Performing data intake across a variety of sources, properly adjusting pricing and redeploying updated prices in real time requires an effective, modernized data infrastructure. The first component of this technology stack involves devices capable of capturing and processing data signals at the edge. These devices can range in complexity from simple barcode scanners tracking product inventories to smartphones in the hands of rideshare drivers transmitting location and traffic-pattern data. Importantly, collecting and storing data from disparate sources requires unstructured database systems that can handle a greater variety of data formats than their structured counterparts. Finally, a modern data stack should be capable of moving data in real time, in contrast with legacy batch-processing systems, to ensure that pricing updates are directly and instantaneously responsive to factor changes.

Adoption Trends

As we look to the technology companies that enable these modern capabilities, it’s important to also consider new industries that are now capable of executing real-time pricing. Three key areas that serve as examples of the transformational potential of real-time dynamic pricing are advertising, utilities and transportation. In advertising, increased scrutiny of return on advertising spending and more intense competition for share of spending has led to a greater emphasis on measuring ad effectiveness. As conversion systems get better at attributing customer purchases to engagement with specific ads, we expect ad inventory pricing to be more value-driven and dynamically respond to periods of higher and lower engagement. In the utilities sector, we believe that the power-supply issues caused by the continuous construction of data centers may prompt power companies to increase electricity costs during peak times. This approach aims to lower peak consumption, and the resultant capacity needed to support it. In transportation, we see the ridesharing industry as an example for aviation and public transport. Real-time analysis of ticket demand, crowd sizes, price checking, and other related factors could better allow transportation companies to flexibly spread capacity and adjust pricing to best serve demand.

At Newton, we continue to invest in leading companies who are at the forefront of either delivering innovation in real-time pricing or are beneficiaries of its application. We also consider the implications of its adoption from a sustainability perspective.

With UK politics now firmly settled upon a new course, we note that over half the entire global population will have a similar opportunity in choosing its future political leaders this year. Electorates in many countries are growing tired of established party policies, opening the door for populists to gain a share of power with promises of easy fixes for complex problems.

Just as election results may well change many lives this year, they could also prove consequential for investors in areas such as fiscal and monetary policy, inflation, international trade and broader geopolitical relations.   

Interpreting the macroeconomics is key

As a mixed-assets portfolio manager, it is critical to identify and try to understand how these factors may affect different asset classes. In the short term, the impact of most elections is highly unpredictable, as manifesto promises can often evaporate after polling day. As a result, we focus on the fundamental and longer-term drivers which can often be far more significant. These drivers can clearly be shaken by political shocks, so we believe it makes sense for investors to harness the flexibility and adaptability of mixed-asset strategies that can identify opportunities in the face of such uncertainty.

US dominance

Around 60% of global equity markets, by value, are listed in the US. The US economy also makes up around 25% of global GDP, so it is understandable that its elections have the potential for outsized influence on investment portfolios. In many important aspects, however, such as fiscal positions or geopolitical considerations, the outcome of the US presidential election in November this year is unlikely to result in many significant changes, even though the candidates differ in their approach to areas such as immigration, Russia’s invasion of Ukraine, or energy policy. More importantly, the scale and dominance of US equity markets over recent years is the result of generous returns sustained by an era of loose monetary policy and a reassurance that authorities would be likely to intervene to smooth out the worst impact of a sharp downturn in economic activity.

US debt burden

After several years of support, the US now has an unenviable debt burden of more than 121% of GDP. Pandemic aside, this is almost double the level of the previous cyclical peak in the mid-1990s (around 65%). The outlook is also uncertain, with an ageing population likely to place a compounding burden on key welfare costs. We expect these costs to far exceed economic growth and tax revenues. One key US medical provider said recently that it expects health care to account for an additional 2% of US GDP annually by 2044. 

Many might argue that this does not matter too much because the US dollar remains the dominant global currency of trade and wealth. To date, those who want to trade with the largest consumer economy globally have had little choice but to accept payment in US dollars. They would then also have little alternative but to invest their dollar profits in US assets (US government bonds and stocks).

US dollar hegemony under threat?

This is a circularity that has supported the US currency, market valuations and ever-increasing public debt for decades. However, the dollar’s hegemony appears to be under threat as other global powers take an increasingly political stance, often at odds with the US’s own foreign policy. The huge scale and increase in wealth of China and India’s middle classes suggest there are now alternative consumer markets for manufacturers to pursue. The emerging economies of two decades ago are now economic powerhouses in their own right and increasingly asserting their stature as new global trading patterns emerge. 

While the US remains the pre-eminent global economy and leads the world in technological development, threats to its global dominance are emerging thanks to the trifecta of political change, indebtedness and competitionbetween global powers, as identified by our big government, financialisation and great power competition investment themes.

What does this mean for mixed-asset portfolios?

It is tempting to view higher bond yields (combined with easing inflation) as offering an attractive invitation to invest more in the asset class. However, higher yields can also reflect renewed recognition of the future risk that investors face as the scale of the debt burden comes home to roost. For us, this is a longer-term issue. In the meantime, we believe the higher yield on offer from bonds means there may be opportunities to use them as a tactical risk hedge in volatile markets.

In equities, meanwhile, the US market has become narrowly led by a handful of mega-cap stocks, with ten firms comprising 30% of the S&P 500 index. This is largely thanks to enthusiasm for artificial intelligence, which has the potential to be truly transformative both to existing processes and new innovative possibilities. However, as always, it is important to retain perspective when constructing a mixed-asset investment portfolio, and to try to maintain exposure to transformational trends. We believe this must be considered as part of a further diversification of assets and we remain cognisant that such material tailwinds can fade over time.

All this points to why we believe it makes sense for investors to consider a global mandate, which enables asset managers to pursue opportunities without being tied to asset class or index constraints. Newton’s multidimensional research team identifies and monitors the thematic drivers that shape markets and the outlook for individual firms to identify compelling opportunities, irrespective of location.    

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.

With UK politics now firmly settled upon a new course, we note that over half the entire global population will have a similar opportunity in choosing its future political leaders this year. Electorates in many countries are growing tired of established party policies, opening the door for populists to gain a share of power with promises of easy fixes for complex problems.

Just as election results may well change many lives this year, they could also prove consequential for investors in areas such as fiscal and monetary policy, inflation, international trade and broader geopolitical relations.   

Interpreting the macroeconomics is key

As a mixed-assets portfolio manager, it is critical to identify and try to understand how these factors may affect different asset classes. In the short term, the impact of most elections is highly unpredictable, as manifesto promises can often evaporate after polling day. As a result, we focus on the fundamental and longer-term drivers which can often be far more significant. These drivers can clearly be shaken by political shocks, so we believe it makes sense for investors to harness the flexibility and adaptability of mixed-asset strategies that can identify opportunities in the face of such uncertainty.

US dominance

Around 60% of global equity markets, by value, are listed in the US. The US economy also makes up around 25% of global GDP, so it is understandable that its elections have the potential for outsized influence on investment portfolios. In many important aspects, however, such as fiscal positions or geopolitical considerations, the outcome of the US presidential election in November this year is unlikely to result in many significant changes, even though the candidates differ in their approach to areas such as immigration, Russia’s invasion of Ukraine, or energy policy. More importantly, the scale and dominance of US equity markets over recent years is the result of generous returns sustained by an era of loose monetary policy and a reassurance that authorities would be likely to intervene to smooth out the worst impact of a sharp downturn in economic activity.

US debt burden

After several years of support, the US now has an unenviable debt burden of more than 121% of GDP. Pandemic aside, this is almost double the level of the previous cyclical peak in the mid-1990s (around 65%). The outlook is also uncertain, with an ageing population likely to place a compounding burden on key welfare costs. We expect these costs to far exceed economic growth and tax revenues. One key US medical provider said recently that it expects health care to account for an additional 2% of US GDP annually by 2044.  

Many might argue that this does not matter too much because the US dollar remains the dominant global currency of trade and wealth. To date, those who want to trade with the largest consumer economy globally have had little choice but to accept payment in US dollars. They would then also have little alternative but to invest their dollar profits in US assets (US government bonds and stocks).

US dollar hegemony under threat?

This is a circularity that has supported the US currency, market valuations and ever-increasing public debt for decades. However, the dollar’s hegemony appears to be under threat as other global powers take an increasingly political stance, often at odds with the US’s own foreign policy. The huge scale and increase in wealth of China and India’s middle classes suggest there are now alternative consumer markets for manufacturers to pursue. The emerging economies of two decades ago are now economic powerhouses in their own right and increasingly asserting their stature as new global trading patterns emerge. 

While the US remains the pre-eminent global economy and leads the world in technological development, threats to its global dominance are emerging thanks to the trifecta of political change, indebtedness and competitionbetween global powers, as identified by our big government, financialisation and great power competition investment themes.

What does this mean for mixed-asset portfolios?

It is tempting to view higher bond yields (combined with easing inflation) as offering an attractive invitation to invest more in the asset class. However, higher yields can also reflect renewed recognition of the future risk that investors face as the scale of the debt burden comes home to roost. For us, this is a longer-term issue. In the meantime, we believe the higher yield on offer from bonds means there may be opportunities to use them as a tactical risk hedge in volatile markets.

In equities, meanwhile, the US market has become narrowly led by a handful of mega-cap stocks, with ten firms comprising 30% of the S&P 500 index. This is largely thanks to enthusiasm for artificial intelligence, which has the potential to be truly transformative both to existing processes and new innovative possibilities. However, as always, it is important to retain perspective when constructing a mixed-asset investment portfolio, and to try to maintain exposure to transformational trends. We believe this must be considered as part of a further diversification of assets and we remain cognisant that such material tailwinds can fade over time.

All this points to why we believe it makes sense for investors to consider a global mandate, which enables asset managers to pursue opportunities without being tied to asset class or index constraints. Newton’s multidimensional research team identifies and monitors the thematic drivers that shape markets and the outlook for individual firms to identify compelling opportunities, irrespective of location.    

With a familiar picture of rising public spending, loose fiscal discipline and anaemic economic growth in markets such as the UK, we expect to see both shocks and opportunities ahead for global fixed-income investors.

The ‘regime change’ in the macroeconomic backdrop has seen quantitative easing and low interest rates give way to higher inflation. It also signifies the arrival of shorter, more violent and unpredictable business cycles. For us, these conditions show similarities to market conditions last seen in the UK in the 1970s.

Such a backdrop can complicate both strategies and timing decisions for investment managers, and we believe bond investors need to adopt a fresh, more unconstrained approach. Nevertheless, we do believe some attractive yield will be on offer for those whose strategies succeed.

Reshoring efforts and debt challenges

Despite the recent success of central banks in targeting inflation, we believe the higher-for-longer inflation backdrop will endure for some time yet. We anticipate that financial markets will increasingly be called upon to fund both the reshoring of supply chains and rising national fiscal deficits.

During the pandemic, much of the private sector borrowed cheaply and extended the maturity profile of its debt. Many governments also borrowed, but, in some cases, did not extend the debt maturity profile at a time when interest rates were close to historic lows.

Sovereign debt burdens are now a key market talking point for many nations, in terms of the possible risks that may lie ahead. We have seen on a few occasions how market-driven events can quickly lead to major corrections in bond yields. We saw it in the eurozone sovereign debt crisis, and in other fiscal mishaps that have played out in the past. Our view is that policymakers will need to tread carefully in an environment where inflation is higher and stickier than witnessed over the last few decades.

US risks

One country we believe fixed-income investors should watch closely is the US. Against a backdrop of high and rising US debt, we believe there is quite a high probability that the US Treasury market could see a sharp market correction within the next five years, regardless of who wins the upcoming US presidential election.

Recent data suggests the US jobs market may be softening, while other US economic warning signs include recent rises in credit card and auto loan defaults, as well as small business bankruptcies.

While it may have become taboo in some quarters to utter the ‘R’ word, some economic signals suggest the likelihood of a US recession is, in fact, increasing. Ironically, we note these latest warning signs are building just as wider talk around recession appears to have evaporated.

Our view is that the evolving economic backdrop will require some deft handling by the US Federal Reserve in terms of its interest-rate manoeuvres.

Rising yields

Despite this uncertain backdrop, higher yields do create opportunities for fixed-income investors who can time their market interventions correctly and take advantage of wider dislocations and pockets of opportunity. We believe fixed-income markets can still throw up alpha, and that we are currently in a market cycle that is conducive to generating income from bond investments. Yield matters, and there is considerable demand from sectors of the market, such as pension funds and retirees, for the higher yields that fixed income can now deliver. In our view, it is possible to construct a diversified bond portfolio that provides yields similar to those available from credit, while being more resilient.

Unconstrained approach

We believe that over the next few months, fixed-income opportunities appear compelling, even if the medium-term picture is less clear. In our view, the uncertain market conditions call for an active and unconstrained approach to fixed income, along with dynamic decision making, careful market navigation and strong security selection. Despite some continuing macroeconomic challenges, we believe there is significant value to be found across bond markets at this time.

Key Points

• We expect inflation and interest rates to persist at higher levels than in the previous market regime.
• Alongside this, elevated levels of post-Covid government debt create a drag on economies which, in turn, can lead to broadly more volatile market returns.
• With governments needing to maintain spending on health and defense, the appetite for fiscal policy to support growth is undermined by the interest bill.
• When the market trinity of inflation, debt and interest rates is on the rise, market anxiety rises, as does higher volatility.
• We believe we have entered this phase but there are early signs that calm can return.

It might appear to be stating the obvious, but for markets to be in a good mood, the market ‘trinity’ of inflation, debt and interest rates, all need to be well behaved. All three indicators are connected, of course, but if inflation remains stable and at low levels, interest rates do not need to be too elevated. Meanwhile, if government debt is stable and not too much of a burden, free markets are able to continue investing capital productively.

In this new market regime, we keep talking about how we expect inflation to remain consistently higher than previously and, as a result, interest rates will need to be higher too. Alongside this, elevated levels of post-Covid government debt create a drag on economies which, in turn, can lead to broadly more volatile market returns.

In this blog, we assess the current state of this trinity of market influencers through the lens of our macro themes.

Persistent Inflation

Inflation has been on a rollercoaster ride since the Covid pandemic, driven higher by labor misalignment and energy-price spikes following Russia’s invasion of Ukraine and the consequent need for energy-supply adjustments. There then followed a downward trend where the energy price effects fell away, only to be replaced by the legacy concerns over higher wage costs. Wage inflation, once entrenched, is always difficult to remove, especially when ageing demographics and spending patterns are creating high demand for labor at the same time as we are seeing a shortage of the right employees.

To control this scenario, central banks need to create an environment in which unemployment rises. Using interest rates to do this can be both blunt and slow. The latest US Employment Cost Index has reminded the market that wage inflation is not coming down; this is unsurprising, given that US employment remains strong and is yet to turn meaningfully. Against this economic backdrop, we believe the US central bank will remain careful not to remove the tight monetary policy too soon. With inflation creeping back up and thereby pushing interest-rate expectations higher again, the market has become anxious once more.

In a previous blog, Market Outlook: A Case of ‘Déjà Vu’, we suggested that this inflationary growth phase would follow the ‘Goldilocks’ market period (where the trinity of market indicators were in line) and that it would lead to market volatility. It appears that we may have now reached this phase.

Human Capital

There is one of our important macro themes at play here: human capital (the change in the type and cost of labor). This theme identifies the change in demographics that causes the shortage of labor, as well as the possibility that companies need to find alternatives. In the previous market regime, labor was relatively cheap and had little influence on the cost of production. Now, with wage growth running at higher levels than inflation, it is expensive, and increases the incentive to invest capital in alternatives (artificial intelligence and robots).

Recent data suggests there is a gradual deterioration in labor hiring, and this will eventually remove the need for higher rates. For the next few months though, we suspect that markets will continue to fret over inflation, with a heightened focus on the level of interest rates and central bank comments.

Government Debt

The third element of the market trinity, government debt, could prove to be important for the longer-term level of markets. Government debt levels have skyrocketed in recent years owing to the need to support the financial system after 2008 and the consumer during the pandemic. With government debt rising to levels not seen since the 1930s, and the cost of servicing that debt also on the rise, should we be concerned about the sustainability of that debt? We believe ‘yes’ is the answer, although there is always a ‘but’.

Our big government theme, which identifies the increased involvement of governments in the running of economies, concludes that high debt levels are here to stay. The post-Covid increase in social spending gave way to an increased focus on the need to be more self-sufficient in energy and supply lines.

General Government Debt Trends for Selected Developed Markets (% of GDP)

Source: Macrobond, International Monetary Fund Data as of April 5 2024

Furthermore, our geopolitical macro theme great power competition defines a period of heightened conflict resulting in a need for governments to increase defense spending. The chart below shows the change in defense spending for NATO members between 2019 and 2023 as a percentage of GDP.

NATO Defense Expenditure, % of GDP

Source: Macrobond and NATO, December 2023

Higher government debt levels may not be all bad news, however, as the offset to an increase in government debt is usually a reduction in private-sector debt. Taking the US as an example, since the 2008 global financial crisis we have seen a reduction in private-sector debt, particularly in financials (a direct response to the banking crisis) and households (which saw increased savings during the Covid pandemic).

Debt Concerns

The concern for the market, though, is that the cost of debt keeps rising and, eventually, governments cannot afford the interest-rate bill. With bond yields set to remain higher for longer (reflecting the higher inflation story), this seems a legitimate concern. In addition, with governments needing to maintain spending on health and defense, the appetite for fiscal policy to support growth is undermined by the interest bill.

Less flexibility on spending plans can result in frequent political change, as successive governments fail to fulfil their electoral policies, and a potential crowding out of other investments. We believe fears might grow that the debt is unsustainable, and investors may start to worry about default.

In the past, high debt levels have been managed through financial repression (post global financial crisis) and by inflating the problem away. If inflation is high, nominal GDP grows rapidly and so too does tax revenue. Ultimately, the debt becomes more affordable. This appears to be the phase we are in now. Meanwhile, forcing domestic investors to buy the bonds issued by the governments is also an approach which allows the debt to find buyers while we wait for inflation to have an impact. In some countries (Japan, for example) this may be required to allow the central banks to stop their bond purchases.

Could Calm Return?

When the market trinity of inflation, debt and interest rates is on the rise, market anxiety rises, as does higher volatility. We believe we have entered this phase but there are early signs that calm can return. Tighter monetary policy is starting to influence employment, thus reducing the need to have higher wages. Unfortunately, it may take some time for headline inflation to resume its downward trend which, in turn, will allow central banks to reduce interest rates. Higher-for-longer inflation and interest rates can raise awareness of the cost of high government debt levels, which also keeps markets nervous. And yet here too, we can see some solutions further down the road. In an upcoming blog, we will delve more deeply into the potential for deflation to become the dominant theme later in the year.

It might appear to be stating the obvious, but for markets to be in a good mood, the market ‘trinity’ of inflation, debt and interest rates, all need to be well behaved. All three indicators are connected, of course, but if inflation remains stable and at low levels, interest rates do not need to be too elevated. Meanwhile, if government debt is stable and not too much of a burden, free markets are able to continue investing capital productively.

In this new market regime, we keep talking about how we expect inflation to remain consistently higher than previously and, as a result, interest rates will need to be higher too. Alongside this, elevated levels of post-Covid government debt create a drag on economies which, in turn, can lead to broadly more volatile market returns.

In this blog, we assess the current state of this trinity of market influencers through the lens of our macro themes.

Persistent inflation

Inflation has been on a rollercoaster ride since the Covid pandemic, driven higher by labour misalignment and energy-price spikes following Russia’s invasion of Ukraine and the consequent need for energy-supply adjustments. There then followed a downward trend where the energy price effects fell away, only to be replaced by the legacy concerns over higher wage costs. Wage inflation, once entrenched, is always difficult to remove, especially when ageing demographics and spending patterns are creating high demand for labour at the same time as we are seeing a shortage of the right employees.

To control this scenario, central banks need to create an environment in which unemployment rises. Using interest rates to do this can be both blunt and slow. The latest US Employment Cost Index has reminded the market that wage inflation is not coming down; this is unsurprising, given that US employment remains strong and is yet to turn meaningfully. Against this economic backdrop, we believe the US central bank will remain careful not to remove the tight monetary policy too soon. With inflation creeping back up and thereby pushing interest-rate expectations higher again, the market has become anxious once more.

In a previous blog, ‘Market outlook: A case of déjà vu’, we suggested that this inflationary growth phase would follow the ‘Goldilocks’ market period (where the trinity of market indicators were in line) and that it would lead to market volatility. It appears that we may have now reached this phase.

Human capital

There is one of our important macro themes at play here: human capital (the change in the type and cost of labour). This theme identifies the change in demographics that causes the shortage of labour, as well as the possibility that companies need to find alternatives. In the previous market regime, labour was relatively cheap and had little influence on the cost of production. Now, with wage growth running at higher levels than inflation, it is expensive, and increases the incentive to invest capital in alternatives (artificial intelligence and robots).

Recent data suggests there is a gradual deterioration in labour hiring, and this will eventually remove the need for higher rates. For the next few months though, we suspect that markets will continue to fret over inflation, with a heightened focus on the level of interest rates and central bank comments.

Government debt

The third element of the market trinity, government debt, could prove to be important for the longer-term level of markets. Government debt levels have skyrocketed in recent years owing to the need to support the financial system after 2008 and the consumer during the pandemic. With government debt rising to levels not seen since the 1930s, and the cost of servicing that debt also on the rise, should we be concerned about the sustainability of that debt? We believe ‘yes’ is the answer, although there is always a ‘but’.

Our big government theme, which identifies the increased involvement of governments in the running of economies, concludes that high debt levels are here to stay. The post-Covid increase in social spending gave way to an increased focus on the need to be more self-sufficient in energy and supply lines.

General government debt trends for selected developed markets (% of GDP)

Source: Macrobond, International Monetary Fund data as of 5 April 2024

Furthermore, our geopolitical macro theme great power competition defines a period of heightened conflict resulting in a need for governments to increase defence spending. The chart below shows the change in defence spending for NATO members between 2019 and 2023 as a percentage of GDP.

NATO defence expenditure, % of GDP

Source: Macrobond and NATO, December 2023

Higher government debt levels may not be all bad news, however, as the offset to an increase in government debt is usually a reduction in private-sector debt. Taking the US as an example, since the 2008 global financial crisis we have seen a reduction in private-sector debt, particularly in financials (a direct response to the banking crisis) and households (which saw increased savings during the Covid pandemic).

Debt concerns

The concern for the market, though, is that the cost of debt keeps rising and, eventually, governments cannot afford the interest-rate bill. With bond yields set to remain higher for longer (reflecting the higher inflation story), this seems a legitimate concern. In addition, with governments needing to maintain spending on health and defence, the appetite for fiscal policy to support growth is undermined by the interest bill.

Less flexibility on spending plans can result in frequent political change, as successive governments fail to fulfil their electoral policies, and a potential crowding out of other investments. We believe fears might grow that the debt is unsustainable, and investors may start to worry about default.

In the past, high debt levels have been managed through financial repression (post global financial crisis) and by inflating the problem away. If inflation is high, nominal GDP grows rapidly and so too does tax revenue. Ultimately, the debt becomes more affordable. This appears to be the phase we are in now. Meanwhile, forcing domestic investors to buy the bonds issued by the governments is also an approach which allows the debt to find buyers while we wait for inflation to have an impact. In some countries (Japan, for example) this may be required to allow the central banks to stop their bond purchases.

Could calm return?

When the market trinity of inflation, debt and interest rates is on the rise, market anxiety rises, as does higher volatility. We believe we have entered this phase but there are early signs that calm can return. Tighter monetary policy is starting to influence employment, thus reducing the need to have higher wages. Unfortunately, it may take some time for headline inflation to resume its downward trend which, in turn, will allow central banks to reduce interest rates. Higher-for-longer inflation and interest rates can raise awareness of the cost of high government debt levels, which also keeps markets nervous. And yet here too, we can see some solutions further down the road. In an upcoming blog, we will delve more deeply into the potential for deflation to become the dominant theme later in the year.

Key points

• The rise of global shareholder resolutions in recent years can be partly explained by the right to file a shareholder resolution becoming a more common escalation tool for investors.
• Over the last decade, much of this growth has been via environmental and social resolutions, which we believe have been impactful in achieving changes to corporate governance arrangements.
• Newton believes shareholder resolutions deserve a case-by-case approach and careful consideration as to the context of the company; our view is that a manager’s shareholder proposal voting record is not always a great proxy for effective stewardship.
• Below, we share insight on how we think about some common shareholder resolutions and how the trends have evolved over the years, noting a surge in environmental and social resolutions including, more recently, ‘anti-ESG’ resolutions such as requests for cost and benefit analysis on diversity, equity and inclusion programmes at companies.

As a steward of capital, Newton is committed to the responsible allocation, management and oversight of that capital to create long-term economic value for its clients. An important part of this stewardship role is the exercise of ownership rights, including proxy voting.

Taking the example of the US, as of mid-July 2022, a total of 813 resolutions were filed in the Russell 3000 index and 642 in the S&P 500 index – denoting the maximum numbers reported in each index for the last five years. Of these resolutions, Russell 3000 companies received 471 proposals on environment and social considerations (58% of the total shareholder resolutions), up from 328 in 2018.[1]

Shareholder resolutions not a new phenomenon

The filing of shareholder resolutions is not a new phenomenon though. In the US, the Securities and Exchange Commission (SEC) introduced regulations in the mid-20^th century, particularly with the adoption of Rule 14a-8 in 1976, which allowed shareholders to submit proposals for inclusion in a company’s proxy materials. This regulation aimed to democratise corporate governance and ensure that shareholders had a mechanism to express their views on important matters affecting the company. These proposals typically covered a range of governance issues, such as advocating for the repeal of classified boards and the adoption of cumulative voting.

Similarly, in the UK, shareholders became more active in the late 20^th century, spurred by corporate governance scandals and a growing emphasis on shareholder rights. Back then, shareholder resolutions in the UK often focused on issues related to corporate governance, such as the separation of chair and CEO roles and increasing board independence, greater transparency and accountability in executive compensation, as well as issues related to shareholder rights such as improving proxy access or enhancing the ability of shareholders to call special meetings. While the UK regulatory framework differs from that of the US, principles of shareholder democracy and engagement have driven the establishment of mechanisms for shareholders to file resolutions and engage with companies on governance issues.

Making management and boards accountable

The rationale behind establishing the right for shareholders to file proposals lies in the belief that shareholders, as owners of the company, should have a say in its direction and governance. Shareholder resolutions serve as a tool for shareholder to hold company management and boards accountable, address governance concerns, and advocate for changes that align with their interests and values. Over time, they have become an integral part of corporate governance, reflecting the increasing emphasis on transparency, accountability and responsible business practices. While the specifics of shareholder rights and regulations may vary between jurisdictions, the underlying principle of empowering shareholders to participate in corporate decision-making remains consistent.  

As highlighted above, the long-term trend was that shareholder resolutions mostly focused on installing a change in a company’s arrangements that were considered unfriendly to shareholders, such as majority voting standards or proxy access. Compared to the US, shareholder resolutions were also less common in Europe and the UK for many years, where arguably direct engagement with company management (stakeholder engagement) was more accepted than in the US, where the rise of the hedge funds and ‘activist’ investors had created a sense of misalignment and interference which resulted in an increased uptake of the shareholder resolution tool.

Extreme escalation strategy at the expense of patient engagement

At Newton, we believe the ability of shareholders to file resolutions at company general meetings is an important and powerful tool, and one that should be exercised in exceptional circumstances. If used responsibly, shareholder resolutions could serve as a protective tool, addressing the agency problem between management and other stakeholders where these can create different incentives.  As we have demonstrated, the uptake and use of shareholder resolutions has increased significantly over the last few years and, often, we believe it can be an extreme escalation strategy at the expense of patient engagement with the company over time.

We have always subscribed to the idea that one should not vote indiscriminately in favour of shareholder resolutions, and this has become even more important recently, as many have spilled over into the environmental and social area, which can lead to greater complexity and ambiguity. Some reports may have us believe that all well-intentioned ‘E’ and ‘S’ resolutions should be supported and that is the true measure of a responsible steward. We believe, however, that it is important to explore the nuance and context of each of these votes and take a discerning, case-by-case approach to ensure we are taking actions that are in our clients’ best interests for the strategies they have invested in. Below, we peel back the layers of our approach to shareholder resolutions, highlighting how we evaluate each resolution on its own merits.

Enhancing the value of our clients’ assets

Our primary focus is delivering on our clients’ mandate with us in a diligent way. This commitment calls on us us to act as thoughtful, active investors, and we believe this includes the way we exercise the ownership rights of the capital we have invested on our clients’ behalf. Unless explicit in the product prospectus or stipulated in the mandate, we seek to deliver good risk-adjusted returns as a singular goal.

Corporate governance arrangements are material to all businesses and, over the years, we believe it has been in our interests to support many shareholder resolutions as they have sought to enhance our rights to protect our clients’ capital should something go wrong with the leadership of the investment. Examples of this could be the right to vote on material related-party transactions or having the ability to (through a democratic majority) eject a director for mismanagement or poor performance (plurality voting vs majority voting standards).

The importance of context and details

While most of these resolutions have been guided by a universal stance on a particular issue, we have still always taken into account the details and the context. For example, a shareholder resolution seeking changed proxy access thresholds should be considered in the context of the shareholder makeup of the company (dispersed or concentrated) and we would, for example, support a lower threshold if the ownership was more dispersed. In other instances, we may have engaged with the company on the issue and have sought assurances that they are making the relevant changes. We would then give management the benefit of the doubt and oppose the resolution. Ultimately, we invest in companies that we believe in and support, and if we find such egregious arrangements in the governance system through our analysis, we would not invest in the first place.  

Below are some of our key considerations for shareholder resolutions:

• Does the requested action align with our view on the topic raised?

• Will the outcome be additive to our investment case or benefit our clients in other ways?

• Are we already engaging with the company on the issue?

• Is the proponent’s request proportionate and reasonable to the issue in question and to the company?

• Is the proposal practical and sensible in relation to the size and type of company?

Using this approach, Newton supported 47% of the total shareholder resolutions it voted in 2023 (56% of G-related and 37% of total E and S-related resolutions). The stewardship team worked particularly closely with the responsible investment research and wider investment teams to ensure that the E and S resolutions in particular were understood and discussed.

Scrutiny on political spending and lobbying

Our scrutiny also extends to areas such as political contributions and lobbying, race equity and board composition, after a recent upsurge in shareholder resolutions related to political spending and lobbying at US companies. Such resolutions seek increased disclosure of political and/or lobbying spending or reporting on alignment of such spending to corporate statements and policies.

We believe this surge is driven by concerns about the influence of corporate political spending on legislation and regulation, as well as concerns that political expenditures may expose companies to significant reputational risk, particularly if that spending supports political positions that do not align with a company’s public position on an issue.

We tackle these resolutions on a case-by-case basis. To illustrate, for a global beverage company, we supported a shareholder resolution asking for a report on how its political spending aligned with the company’s values and priorities. This was mainly owing to a discrepancy we observed between the company’s public pledge to recycle every bottle it sells by 2030, and its opposition to container-deposit laws that aid recycling initiatives. Furthermore, the company has contributed to supporters of a contentious voter rights law, which contradicts its stated commitment to workforce equality and inclusion. Our view is that it would be advantageous for shareholders if the company was to address the contradiction between its political expenditures and its declared commitments to diversity and the environment.

Climate change

Many companies are now approaching their first interim climate-related targets against a backdrop of difficult macroeconomic conditions: countries are under severe budgetary pressure following the pandemic and there is immense strain on energy markets owing to the Russia-Ukraine war. Many energy companies have benefitted from windfall gains, while people are struggling with a cost-of-living crisis. This has resulted in heightened attention around climate stewardship and climate activities at company AGMs, most notably those of big oil companies.

Where shareholders had an opportunity to vote on climate-transition plans at AGMs in 2023, or voice concerns by voting on shareholder proposals or other standing items, we applied a case-by-case analysis. This was based on the expectations laid out for companies by our voting guidelines and feedback from the extensive multi-year engagements we have had with three of the five big oil companies, whose AGMs attracted substantial stakeholder attention given their respective levels of global emissions. Overall, we opposed one executive as we considered that the board was not engaging in strategic thinking on the company’s net-zero approach and was disregarding material climate considerations.

The transition to a low-carbon world presents significant risks that will affect the overall operating environment of many companies we are invested in and, in some cases, the companies’ licence to operate and their long-term existence. While we have observed a slight decline in support for climate-related proposals owing to their prescriptive nature and politicisation of the debate, our commitment to scrutinise each proposal remains unwavering.

Racial equality and civil rights

In the realm of racial equity and civil rights, we believe our approach is comprehensive and deliberate. We recognise the crucial importance of addressing and actively engaging with these systemically critical issues. Our stance is clear: when a company’s disclosures fall short, or when controversies have marred its commitment to racial equity, we would benefit from shareholder resolutions asking for adequate disclosures or audits, as this would enable us as shareholders to gain deeper insights into related risks and assess whether the company is effectively managing these issues, thus safeguarding financial materiality.

For us, these votes underscore our commitment to driving change where it is most urgently needed. On the other hand, when a company has demonstrated a dedication to this cause by setting targets, providing transparent and comprehensive disclosures, and avoiding controversies, we acknowledge its efforts and refrain from supporting the resolution. We believe this nuanced approach not only encourages responsible corporate behaviour, but also recognises and rewards those who are genuinely striving to make a positive impact.

Executive governance

We continue to see resolutions seeking separation of the CEO and chair function. We typically prefer a structure where these roles are clearly separated as we believe it protects us better in terms of challenging executive management and taking the right decisions for the long-term health of the business when something goes wrong, including, if needed, a change in leadership. When this is not in place, we expect robust justification and counterpowers to be in place. Overall, we also expect the board to demonstrate robust succession planning.

We will typically look unfavourably on cases where a company is recombining the chair and CEO roles after a period of separation and may support shareholder resolutions requiring independent chair positions at companies in general, as a good governance practice. For example, at one leading US life science and diagnostics conglomerate, we supported the shareholder resolution that proposed the appointment of an independent director as chair of the board. We observed that the current board leadership structure was complex, with three key figures, including a lead independent director, a relatively new CEO, and a former CEO, who was also the company’s founder and serving as an executive chair.

In this case, adopting a policy for an independent board chair could simplify the leadership structure and enhance independent oversight. Moreover, continuing concerns about excessive pledging within the company indicated that shareholders would benefit from a stronger form of independent supervision. The resolution was not overly prescriptive and allowed the board flexibility in implementing an independent chair policy at its discretion, without an immediate overhaul of the current leadership setup.

Conclusion

In summary, in a complex world that is growing increasingly polarised around issues, a binary approach to voting shareholder resolutions will not be sufficient. We believe our case-by-case philosophy embodies the essence of responsible corporate governance, ensuring that the interests of our clients and the long-term success of the companies we invest in always take centre stage. This will remain more important to us than any ranking or league table displaying our voting record concerning shareholder resolutions.

[1] Source: Shareholder Voting Trends (2018-2022), Brief 1: Environmental and Climate-Related Proposals, The Conference Board (https://www.conference-board.org/pdfdownload.cfm?masterProductID=39966)

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.

Key Points

• The ‘Goldilocks’ soft-landing economic scenario was well entrenched in the first quarter of the year, driven by a disinflationary growth regime.
• Markets now appear to be focused on a more stubborn inflation story, with a measure of heightened geopolitical risk thrown in.
• For Goldilocks (not too hot, not too cold) to be the dominant market phase, we need a soft landing and more modest employment growth.
• We see potential for US bond yields to head back towards 5% to price in the higher-for-longer rate story, while equity markets could be volatile over the coming months.
• However, with strong economic signals coming from the US and many emerging countries, a more synchronized positive growth story could be the dominant narrative for a couple of quarters.

Changing expectations

Market expectations for 2024 appear to be moving on quite rapidly. The much-discussed ‘Goldilocks’ soft-landing economic scenario was well entrenched in the first quarter of the year, driven by a disinflationary growth regime, but now markets appear to be focused on a more stubborn inflation story, with a measure of heightened geopolitical risk thrown in.

Our view is that this phase could bring about considerable market volatility as investors start to worry about structurally higher inflation and the extent of central-bank activity and the interest-rate trajectory. The final phase, in which rate anxiety is followed by economic weakness, could be triggered quite quickly by markets.

Déjà Vu All Over Again

After 40 years in the investment management industry, I get the sense of déjà vu quite often. This time around, we only have to look back as far as last summer to see how markets respond to concerns of higher rates. Last May, we started to see rate expectations rise in the US on the back of a pickup in payroll numbers. While headline inflation was still on its way down from its previous energy price-induced highs, core inflation was still elevated (5.5% in April 2023), and markets started to wonder whether the US Federal Reserve (Fed) might have to raise rates even further to slow employment growth to help bring inflation down.­ ­­­

Sticky Inflation

Currently, while US core inflation had fallen to 3.5% by March 2024, it seems stuck at a level above the Fed’s desired 2% target. Meanwhile, US non-farm payroll employment numbers increased by 303,000 a month in March – the same level as in May 2023! For Goldilocks (not too hot, not too cold) to be the dominant market phase, we need a soft landing and more modest employment growth: too much growth and the Fed tries to cool the porridge by keeping monetary policy tight; too little, and fears of recession (hard landing) start to rise.

Volatile Market Reaction

The market reaction last year pushed 10-year US Treasury yields higher, from 3.30% to 4.99%, reflecting higher interest-rate and inflation expectations. Equity markets were volatile but able to rally, driven primarily by growth expectations around artificial intelligence companies. Additionally, the economic background was robust in the US, supported by strong fiscal spending, population growth and a consumer base insulated from rate increases owing to fixed-rate mortgages.

The sequel market phase in 2024 follows a similar playbook. Bond yields are once again moving to reflect the rising-rate story but, in this latest version, given the elevated levels of equity markets, we are seeing rising equity volatility and price declines.

Investment Implications

Recent moves in some key indicators point towards an inflationary growth regime. Commodities are on the rise, and both European and Chinese economic outlooks have improved from the more negative expectations in the first quarter. With strong economic signals coming from the US and many emerging countries, a more synchronized positive growth story could be the main narrative for a couple of quarters.

We see potential for US bond yields to head back towards 5% to price in the higher-for-longer rate story, while equity markets could find themselves kicked around over the coming months on investor sentiment that oscillates between focusing on good economic growth and anxiety over the added costs associated with higher-for-longer interest rates.