Fabian Estevez

According to JP Morgan’s monitoring, both headline and core global inflation, excluding China and Turkey (where China is experiencing deflation and Turkey has a double-digit inflation rate), increased slightly by 0.3% on a monthly basis in January. While their annual variations continued to decline, headline inflation rebounded to 2.6% in the last three months up to January. Core inflation (excluding volatile components such as food and energy) also saw a slight increase, reaching 3%.

U.S. core goods prices, excluding autos (e.g., apparel, electronics, furniture, etc.), rebounded by 0.16% monthly in January, indicating the end of global goods price deflation in the first half of 2024. Another interesting point to note is that container shipping costs have surged by 150% since the beginning of December. However, supplier lead times still remain near historical levels, suggesting limited impact so far due to geopolitical tensions in the Middle East. Additionally, oversupply in China continues to exert downward pressure on manufactured goods prices.

Furthermore, there was a 0.5% monthly increase in services prices, driven by a 0.7% increase in the United States. Core services (e.g., shelter, medical services, education, etc.) increased by 0.46% on a monthly basis, marking their largest increase since December 2022, pushing the annual rate for the last quarter above the 4-4.5% range. Much of this rebound was attributed to the increase in the United States, reaching an annual rate of 6.2%, while services inflation in developed countries, excluding the U.S., remained stable at 3% annually. Particularly noteworthy was the continued pressure on shelter costs in the United States.

Global food inflation remained stable at close to 3.5% annually, although food inflation in emerging markets accelerated to 6.5% annually. The latter was due to a spike in the weather phenomenon known as “El Niño,” causing localized increases in fresh food prices in Mexico and Brazil.

With this mix of factors, core inflation (a metric of particular interest to central banks) at the global level is expected to rebound to 3.3% in the first quarter of 2024, compared to 3% in the fourth quarter of 2023. In this context, conditions suggest that monetary authorities, especially within developed countries, may temporarily postpone interest rate cutbacks, pending clearer signals of more significant cooling in key categories such as essential services and housing.

 Global Consumer Price Index (CPI) headline and core (excluding China-Turkey), monthly variation (%)

• The dotted lines refer to the three-month moving average. 

Source: JP Morgan

Recently, the renowned investor and Berkshire Hathaway Chairman, Warren Buffett, shared his annual 2023 letter with the company’s shareholders. Similar to previous years, the letter places less emphasis on ‘news’ and more on providing valuable reminders to investors on successful investment strategies, articulated in Buffett’s distinctive style.

Buffett on investing: “Although the stock market is considerably larger than in our early years, today’s active participants are neither more emotionally stable nor better educated than when I was in school. For whatever reasons, the markets now exhibit much more casino-like behavior than when I was young. The casino now resides in many homes and tempts its occupants daily.”

In this context, Buffett’s new letter reiterates some of the principles that have contributed to Berkshire’s success over time, including:

1. Be clear about the purpose of investing.

2. Focus on quality investments, or as he would say in his own words, “wonderful businesses”.

3. Prefer companies run by good management teams. 

4. Stay for the long term, as patience pays off.

As part of his investment philosophy, Buffett highlighted the holding of two stocks that Berkshire could maintain indefinitely, namely Coca-Cola and American Express. These examples emphasize the importance of “sticking with a truly wonderful business” and how “patience rewards, and a wonderful business can make up for the many mediocre decisions that are inevitable.”

This year, Buffett emphasized two additional long-term investments that he expects Berkshire to hold indefinitely. The first is Occidental Petroleum (OXY), a key player in oil and gas and a leader in carbon capture initiatives. The second involves holdings in five large Japanese financial conglomerates: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. He highlighted their good management teams, as well as shareholder-friendly policies, including share buybacks when the price is right, reinvestment of profits to develop their businesses, and reasonable compensation for their executives.

Concerning the succession plan for Warren Buffett,Berkshire supporters have long assumed that Greg Abel, responsible for managing Berkshire’s non-insurance operations, could be the successor. Buffett all but confirmed this notion, noting that Abel “in all respects is ready to be Berkshire’s Chief Executive Officer (CEO) tomorrow.” However, investors may learn more on that topic at Berkshire Hathaway’s annual meeting on May 4th in Omaha.

Finally, on a separate note, Buffett pays tribute to Charlie Munger, who passed away last November, crediting him with guiding Buffett (and subsequently Berkshire) to quality companies. Buffett acknowledges Munger as the “architect” of today’s Berkshire.

Main investments within the Berkshire Hathaway portfolio.

Source: CNBC with Berkshire Hathaway data

* Holdings are as of December 31^st, 2023, as reported in Berkshire Hathaway’s 13F filing on February 14^th, 2024, except for: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo, which are as of June 12, 2023. Also, Occidental Petroleum, which is as of February 5, 2024. At December 31 Berkshire held a cash and cash equivalents position of US$168bn. 

Note: The companies cited in the image do not necessarily constitute an active Axxets/Activest recommendation and are for informational purposes only.

With the launch of ChatGPT a little over a year ago, as well as other artificial intelligence (AI) tools, the exponential growth of these new technologies continues to arouse particular interest due to their contribution to generate important advances in productivity, benefiting various industries, reducing costs and generating efficiencies for both companies and consumers. 

In this sense, it is common to overestimate the effect of technology in the short term and, conversely, to underestimate its impact in the long term. Therefore, it is key to distinguish between what could be considered speculation and trendy, and what could be a real and lasting opportunity over time. As examples, the use of AI in the following sectors stands out:

• Healthcare

• Diagnosis and treatment planning: AI is used to analyze medical images, such as X-rays and MRI scans, for faster and more accurate diagnosis.
• Drug discovery: AI algorithms help to identify potential drug candidates and predict their efficacy.

• Finance:
  • Algorithm-based securities trading: AI is used to analyze financial markets and execute trades at optimal times.
  • Fraud detection: AI algorithms can detect unusual patterns in transactions to identify and prevent fraudulent activities.
• Retail:
  • Customized recommendations: AI analyzes customer behavior to provide customized product recommendations.
  • Inventory management: AI optimizes inventory levels and predicts demand, reducing overstocking or shortages.
• Manufacturing:
  • Predictive maintenance: AI analyzes sensor data to predict equipment failures and schedule maintenance before problems arise.
  • Quality control: AI-driven systems inspect products for defects on production lines.

As seen, the further development of these trends in technology and other areas appears to have the capacity to transform everyday life in the coming years, potentially generating opportunities for companies and investors who possess the virtue of adaptation and patience. 

A wide range of companies are harnessing the potential of AI

Source: U.S. Bureau of Labor Statistics 

The Consumer Price Index (CPI) for January recorded an acceleration of 0.3%, surpassing expectations of 0.2%. This elevated the annual inflation rate to 3.1%, compared to the estimated 2.9% and the 3.4% recorded in December. On the other hand, core CPI inflation, which excludes food and energy, increased by 0.4%, exceeding the forecast of 0.3% and the December figure of 0.3%. In its twelve-month variation, it reached a rate of 3.9% (versus the expected 3.7% and the 3.9% in January).

In the report, the monthly performance of the food component advanced 0.4% (+2.6% annually), highlighted by a 0.5% monthly (+5.1% annually) rebound in food away from home. On the other hand, the energy index declined 0.9% on the month (-4.6% annually), mainly due to a decline in the gasoline component.

Surprisingly, after several months of moderation, the shelter index rebounded in January, registering an increase of 0.6% monthly (+6% annually). It is worth noting that this category contributed more than two-thirds of the monthly increase in the entire CPI. In detail, the rental index increased 0.4% on the month (+6.1% annually), while rent equivalent to owning a home rose 0.6% on the month (+6.2% annually). 

Considering the latest employment and inflation data, it could be thought that the Federal Reserve (FED) will not rush changes in monetary policy, as there is still room for improvement in terms of Core CPI. In this context and after Jerome Powell’s reaffirmation that there will be no cuts in March, conditions and consensus expectations suggest that the first adjustment to the reference rate could take place until the June 12 meeting. As we have previously expressed, with this combination of factors prevailing, it is anticipated that the talk of higher rates will remain until a more pronounced cooling in the economy and/or an improvement especially in the shelter index, which carries specific weight in the cost of living for Americans – is observed.

Change (%) in the last twelve months in CPI and Core CPI

Source: U.S. Bureau of Labor Statistics 

CPI monthly change (%)

Source: U.S. Bureau of Labor Statistics

January is now history, leaving a positive impact on the markets. The S&P 500 closed the month with a 1.6% increase, while the Nasdaq registered a 1% advance. The first month of the year is always full of discussions about how the remaining months might evolve. That said, certain key themes will be on almost every investor’s mind throughout 2024. Here are some perspectives on these.

Can the Economy Continue to Grow at the Same Rate? 2023 was billed as the year of the recession that never came. So far, some signs suggest continued economic resilience. This has generated the possibility of thinking about a very optimistic “Goldilocks” scenario, implying solid growth and declining inflation. Fourth-quarter 2023 GDP data showed a 3.3% year-over-year increase, with the labor market remaining solid, as indicated by the most recent nonfarm payroll report. Looking ahead, it is not out of the question that the economy will experience a deceleration, allowing for a soft landing, meaning healthy employment generation and inflation slowing to the target range. This environment could allow the Federal Reserve (FED) to begin adjusting rates before the end of the first half of the year (the market is discounting a total cut of 100 basis points for the full year), after Jerome Powell made it clear that there would be no adjustment in March.

Will the Dominance of the Magnificent 7 Persist? While there is optimism around the tech sector and the “growth” style, it is unrealistic to assume that these tech giants will perpetually rise together. A high standard implies a small margin for error, as evidenced by the fall of Google and Tesla after reporting lower-than-expected numbers, while Meta and Microsoft presented solid reports. Now, these companies will have to excel in all aspects to please the markets. A key theme this year could be differentiation among the Magnificent 7, with some winners and some losers. It is easy to forget that these are seven very different companies. Therefore, the ability of each to monetize new revenue streams, such as artificial intelligence, could make the difference in staying on top or not.

Should Markets Be Concerned about Geopolitical Tensions? As unfortunate as it is that, in recent years, humanity has entered a new era of rising geopolitical tensions in various regions of the world, as a general rule, geopolitics is not a major driver of long-term returns. In fact, several analyses spanning the 30 major shocks since 1940 concluded that, yes, there is often short-term volatility in the day or two after the event occurs, but at three months, returns were positive 60% of the time. And at three years? That’s 90% of the time. For most investors, geopolitical events are disruptions, but they are generally not turning points. However, elevated geopolitical tensions suggest the need for some hedges, most notably gold and energy-related stocks, to protect against the risk of higher oil prices.

What Could an Electoral Rematch Mean for the Markets? So far, the Democratic and Republican primaries (Iowa, New Hampshire, and South Carolina) suggest a rematch between Joe Biden and former President Donald Trump. It is worth mentioning that these elections are of great relevance for domestic and foreign policy; however, statistics show somewhat scattered results, where the historical average return of the S&P 500 in an election year stands at 13.1% (excluding 2008, when the global financial crisis emerged). Therefore, investors should not base their investment decisions solely on this event but consider a broader analysis that encompasses other economic and financial factors.

Consensus expects sales of the Magnificent 7 to grow at a rate 4x (times) higher than that of the S&P 493.

*CAGR: Refers to compound annual growth rate.

Source:  Goldman Sachs