Last year, you claimed that the US would be the last domino to fall in a deteriorating macroeconomic landscape, contrasting Europe’s ageing economy with the innovation-driven US. How do you view this prediction now?

MeL: Indeed, the US has demonstrated remarkable resilience compared to other economic blocs, primarily due to its flourishing tech sector. However, it’s not without issues, particularly concerning government debt. The US is currently engaged in, or preparing for, multiple global conflicts while pursuing modernisation and infrastructure investment back home. This is happening amid increasingly polarised politics, which hinders political consensus. Moody’s recent downgrade of the US credit rating from stable to negative raises a critical question: who will buy US treasuries and how will this impact the US’ position in the global economy – and markets – going forward.

If we look at global markets today, it feels a bit surreal. By all accounts, we should be seeing markets suffer due to headwinds like inflation and high interest rates, as plummeting consumer and business sentiment, but it seems like markets have become completely detached from the situation on the ground. This obviously raises questions about how sustainable this is and whether we’re just sailing towards an iceberg, blissfully unaware of the impending danger.

As we navigate through 2023, with markets seemingly recovering despite global turmoil, how do you reconcile this with the broader economic context?

MeL: This year’s market behaviour reflects our financial systems’ unique complexities. Despite aggressive monetary policies and geopolitical tensions, markets have maintained stability. This seems driven by a narrative of recovery that overshadows traditional economic indicators, fostering an almost surreal optimism.

A key factor here is the extraordinary liquidity injected during the COVID-19 pandemic and which I believe is mostly to blame for the market’s current optimism.

The pandemic saw governments all over the world pump billions of dollars into keeping their economies afloat while people were told to save home. It was the type of investment that can be compared to the money pumped into the global economy during and after World War II.

In both cases, a considerable amount of that money went to business tycoons of the day. But while in the case of the war, that money was spent on rebuilding housing, infrastructure and producing new consumer products when it was all over, with COVID-19 most of the money went to the few companies that run the global social media and information infrastructure. The Mark Zuckerberg’s and Jeff Bezos’s of this world.

The biggest difference, however, is the fact that a considerable portion of that stimulus was funnelled into the stock market, especially in the US.  This was further amplified by the rise in retail investing, as many individuals, confined at home, began engaging with the stock market more actively. This influx of funds created an environment where the stock market’s performance became, and still are, somewhat disconnected from the broader economic realities.

This optimism is a double-edged sword

This dissonance between market behaviour and economic fundamentals suggests a market that is, in a sense, sleepwalking towards an unseen precipice. And the issue isn’t that we need to somehow wake ourselves up to avoid this, unless, of course, we are in a new normal where the rules of game have changed completely and indefinitely. This optimism could be a double-edged sword, offering short-term gains but potentially leading to serious challenges if there is a big correction further down the line.

You’ve highlighted disparities between different economic sectors. How is this playing out?

MeL: The current economic landscape is increasingly bifurcated, reflecting a deep structural shift. On one hand, sectors like technology, particularly in the US, continue to innovate and drive market optimism. These companies have become not just economic powerhouses but essential components of our global infrastructure. This dominance effectively positions the US at the centre of the digital universe, reaping economic benefits from a global audience. 

On the other hand, sectors more sensitive to economic cycles, like small- and medium-sized enterprises, are struggling. This divergence is evident in the performance of different market indices, with tech-heavy indices like NASDAQ significantly outperforming broader market segments like the Russell 2000.

In contrast, Europe, still reliant on traditional industries, struggles to keep pace with rapid technological advancements. This disparity is not just a reflection of the current climate but also a sign of deeper structural changes in the global economy.

So, does it all boil down to whether we will eventually return to normality or remain indefinitely in uncharted waters?

MeL: To some extent, yes. As we said, by now most predicted that we’d be in a recession. This hasn’t materialised, so the next logical question to ask is whether the recession is off, or whether it’s just been postponed. In my mind, at least for the time being, the fact that it has not happened yet simply means that it could happen any day. I think we’re still seeing a hangover from COVID-19, and while it will take a while, we will eventually revert back to a state of normality. 

This interview is issued by Jesmond Mizzi Financial Advisors Limited and does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA, under the Investment Services Act. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or e-mail info@jesmondmizzi.com.