Wealth Outlook 2024 - Slow then grow

104 Wealth Outlook 2024 | Unstoppable trends The implications of G2 polarization on global technology this year, Chinese producers were believed to be eight years behind their counterparts across the Strait in the processing power and speed of their chips. Coincidentally or not, during the May 2023 G7 summit in Hiroshima, President Biden proclaimed that ties with Beijing would “thaw very shortly.” High-level officials from both countries subsequently started to meet more frequently, setting the stage for a reasonably constructive mid-November face-to- face meeting between Biden and Chinese President Xi Jinping held on the sidelines of an Asia-Pacific Economic Cooperation forum in San Francisco. China still receives billions in US-designed chips every month and the US still depends on Chinese critical minerals. The US is China’s largest export market. After Canada and Mexico, China is the US’s next largest. For better or worse, these two countries remain highly reliant on each other. Now, with each perhaps feeling a little more independent, just maybe they can stick a bit more to “business as usual.” Investment implications As investors, we believe in seeking geographical portfolio diversification with allocations that capture exposure to the global champions, agile players and beneficiaries of the supply chain transitions and changing trade patterns underway. In addition to the US and China, these companies can also be found in other areas of the world, including friends, allies and trading partners such as Vietnam and Mexico. Broadly speaking, despite the return of jobs to the US, it would be cost-prohibitive to replace production and manufacturing performed in China on a one- to-one basis. Manufacturers integrating robotics and AI-enabled logistics to combat the higher labor costs associated with reshoring stand to benefit the most. Beneficiaries also include the suppliers of that equipment, such as the large US, Japanese and European industrial automation and supply-chain management firms. Another winner looks to be the large industrial real estate investment trusts sitting atop much of the zoned-industrial and warehouse properties on either side of the Atlantic. Within the most sensitive parts of supply chains, the leading Taiwan-based chip fabricators would prefer not to have to build out new capacity in the US and Europe as Western security concerns are pressuring them to do. (The economics would be better if they could keep the activity in Taiwan.) For the producers of the high-end equipment going into those fabs, however, all that new fabrication building is a net positive (assuming they can keep up with the orders). New capacity building in the US, Japan, and South Korea should more than offset the decline of the equipment makers’ business in China, which increasingly, it appears, will have its own high-end suppliers to invest in. Moreover, for agile companies there is a cyclical element at play. We think there will be a tailwind for the most global players when manufacturing and economic growth accelerate under less restrictive monetary policies in 2024–2025.