The 2009 animated science fiction comedy disaster film, Cloudy with a Chance of Meatballs, might come with a goofy title but was deemed successful enough to warrant a 2013 sequel by producers Columbia and Sony Pictures Animation.
The film tells the story of aspiring inventor Flint Lockwood, who creates a machine that converts water into food. However, the machine gains sentience and drops hamburgers, pancakes, spaghetti, and yes, meatballs like a thunderstorm in its wake, and the inventor has to stop it in order to save the world.
Lockwood isn’t quite Arnold Schwarzenegger’s Terminator coming back in time to kill the mother of humanity’s future saviour. However, if one goes back all the way to Isaac Asimov’s I, Robot, the issues of artificial intelligence (AI), robotics, and the ethical implications of creating sentient beings — the relationship between humans and machines, consciousness and free — will perhaps underlie the drama at OpenAI last November when CEO Sam Altman was fired by the board only to return in triumph within days, thanks to the backing of Microsoft, its largest investor.
Microsoft, as one of the magnificent seven stocks which inflated in 2023 on the back of the commercial possibilities of the Age of AI, certainly can price generative AI applications into its enterprise sales. Others are making their own inroads — commercially-driven, or otherwise. Taiwanese businessman Lee Kai Fu’s 01.AI start-up released a bilingual large language model (LLM) — and immediately was valued at US$1 billion ($1.33 billion). Singapore, too, is in the field, with $70 million allocated to build Southeast Asia’s own LLM model ecosystem. I am assuming there will be a fair number of “lahs” in there.
Given the risks highlighted by Asimov are no longer science fiction, the Europeans, via the AI Act, are touting the world’s first international treaty on AI, ostensibly to save us from ourselves. Unsurprisingly, the US, even as an observer country, is pushing for exempting companies by default — thereby leaving it up to individual countries to decide whether to “opt in” their own private sector. If they succeed, there may be more money to be made by companies, so long as there are humans still alive to pay for it. If they don’t, perhaps we may have some semblance of AI benefiting humanity while letting smart investors sniff out pockets of profit. For now, don’t ask ChatGPT for 2024’s investment forecast. Given the many data points it will pick up from, it will probably be cloudy, but I am not sure you will get the meatballs that digest well.
Outlook 2024
Meanwhile, one does not need an AI to predict that the first few weeks of January would be filled with bankers holding their annual “weather forecast” events for the year ahead.
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For the organisers, it is always worth the effort to tempt their guests with sumptuous lunches — lubricated with a bit of wine — if there’s a better chance to sell another complex packaged illiquid product. After all, having generally gotten 2023 wrong, it does require one to down quite a few shots before accepting all the soothsaying strategists, analysts and bankers have for 2024.
This time last year, fear of a US recession was on everyone’s lips — which has yet to materialise; China has bottomed given its much-anticipated reopening — it still is dropping; the collapse of FTX will be the final nail in the coffin for the crypto realm — Bitcoin doubled in the past year. And of course, Japan was hardly on anyone’s radar, except this column, which proclaimed then that Japan will be the dark horse of the year. The Nikkei 225 ended 2023 as the second best-performing developed market and has since reached even higher levels.
As we now know, AI became the hype that drove up both the Nasdaq and the S&P 500. Given how these two markets dominate MSCI World indices with a weighting of over 60%, investors with a more conservative posture were hit by falling mark-to-markets in fixed income and REITs. The traditional 60% equities and 40% fixed income did not really deliver — again. Alternatives — the snappier term for “structured products” — and private equity funds generally underperformed, and hedge fund investors would see returns only if they were both lucky and hopeful, given how the few winners were outnumbered by the spectacular blow-outs.
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We could blame the US Fed, Xi Jinping’s schizophrenic stance towards his own country’s markets, or a Western conspiracy against China’s economy. We could also attribute how the markets moved the way they did to Bitcoin’s rise on the back of Binance’s CZ Zhao’s US$4 billion settlement with the SEC; the long-anticipated approval of a bitcoin ETF in the US last week. The only thing that was generally right was the collapse of the Bored Apes in the NFT market which still churns a respectable volume of transactions with prices heading nowhere.
To be fair, I would hate to be in the position of an investment weather forecaster, with so many unknown unknowns and a natural desire to keep investors invested. It is probably better to stick to the straight, tried-and-tested consensus with a slight tilt at either side of the range and be somewhat optimistic. After all, if one gets it wrong, there is the rest of the herd for good company.
Being sceptical and a tad stubborn, I have a tendency to bet “against” the calls made from time to time. However, even if I miss the mark, I do wish there could be more consistency! As readers of this column know, I have generally stuck to a general asset allocation with a home bias on equity — while exercising a bit of kung fu chops rotating among well-known blue chips. Sure, the returns are a tad boring overall, but I get to go on my holidays, and I occasionally hit a jackpot.
So what is the “consensus” weather forecast this year? US equity is good — sticking with last year’s AI winners... Hmm? Yen appreciation seems to be quite popular as well — but to what extent? China and India are popular. One to rebound, the other to “Modi-fly”. A few houses are even neutral to positive on Indonesia and Malaysia and bearish on Singapore! This is understandable given our 40% plus weightage the banks have in the Straits Times Index, with Goldman Sachs latest to downgrade the entire sector — although they are still favourable towards OCBC.
True, no thanks to falling rates seen later in this year, margins might drop at a faster pace — but with scant non-performing loans, potential credit expansion and robust billions in quarterly profits and dividend yields of more than 4%, investors might just stick around, as they buy sectors benefitting from falling rates, and ride on a rebound in semiconductors. This might lead to a triple positive for the STI: steady accretion, high dividends, with no FX losses from SGD strength.
Privately, one of my favourite CIOs from a European Bank gave me three “golden eggs” or ideas that are not shared openly as they are probably not linked to products. Aussie perps — with a AUD rebound and high single-digit coupon and discount-to-face value of European issuers like BNP and SocGen looks quite inspired. Japanese banks — which, given their huge asset base, will be impactful even with marginally higher rates. And gold, with a consensus USD weakness view (although that might be zero sum) — I prefer silver.
What about last year’s dark horse?
Readers might recall I visited Japan last May and November to assess the call I made last January. As a growing list of pundits joined the chorus cheering the Land of the Rising Sun, this column had suggested that a large part of the run was done by the first half of the year, and that there could be more yen weakness to be hedged for a SGD investor. It was on the mark.
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By November, it was evident that the long overdue wage inflation from the end 2022 was followed by companies flexing their pricing power. Exporters benefiting from the weak yen gave an extra flip to profits; and the measures from the Japan Exchange Group’s governance changes to increased allocation by local pension funds, and tax advantages for individuals kicked in this year as shared.
Given my scepticism that AI stocks in the US will have a repeat run, it is reasonable to question if my view on Japan still holds. Simply put, I don’t see equities gaining another 25% this year. However, among developed markets, it has got the most going for it with structural changes in the domestic investing ecosystem led by the Government Pension Investment Fund — and this way of breeding confidence in the home market is something Singapore should do. With a likely strengthening yen, it is probably timely for an unhedged allocation to Japan as part of one’s portfolio.
It is one year belated from my request via this column for a Japan ETF to be listed on the Singapore Exchange S68 . But better late than never. In fact, the newly launched Lion-Nomura Japan Active ETF (powered by AI) may be the best way to express this. It is deliberately “unhedged” on the forex. The first of its kind — an active ETF, with an overlay using AI positively to sieve through a 1,000-stock universe with over 200 factors considered — something that would otherwise involve at least 100 human analysts to cover.
The AI tools that both Lion Global Investors and Nomura employ have a back test result that generates an undisclosed alpha. If 2024 is less of a beta performance year than last, then this is a cheap way to gain access to Japan alpha. Of the pro-forma portfolios top 20 stocks, five are financials adding to 21.9% weight of the AI-generated active selection. Coincidentally, this corresponds to the European bank’s CIO second golden egg.
At this juncture, I need to disclose I was arm-twisted (with no remuneration) into moderating a Jan 12 panel discussion involving Ong Ai Ling, Lion Global Investors’ head of AIOI (artificial intelligence of investments); Li Xu Chun, MAS’s head of AI development office; Geoff Howie, SGX’s market strategist; and Kazuhiko Yoshimatsu, JPX’s Singapore general manager. And, I will subscribe for a small allocation of the ETF too. I may even try a bit of non-AI kung fu to augment the allocation with a bit of cheap trading through my broker. Hopefully, I will be able to extract some meatballs through a cloudy 2024. The horse doesn’t have to be dark. It just has to be alive!
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore
