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Four potential 'black swans' for 2024

Hamas’s attack on Israel on 7th October and the resulting conflict in Gaza caught investors by surprise and led to market volatility amid concerns it could escalate into a wider war in the Middle East. What new ‘black swans’ could the world face in 2024?

Marlborough’s multi-asset investment team have conducted scenario analysis looking at extreme events that, while unlikely, are still plausible. Here are four scenarios the team have considered that could have a significant impact on markets in the year ahead.



China turns its back on Russia to increase trade with the West

China has proved Russia’s most important ally during Vladimir Putin’s war in Ukraine, with a US government intelligence report citing Beijing as pursuing a variety of economic mechanisms for Russia to “mitigate both the impact of Western sanctions and export controls”.

The report highlighted China’s increased purchases of Russian oil and gas and cited the “probable” supply of dual technology equipment – items with civilian and military uses, such as drones – for use in Ukraine.

However, China is contending with serious economic challenges, including weak growth, high youth unemployment and a deeply troubled property market.

Chinese President Xi Jinping’s economic predicament gives him a compelling reason to improve relations with the US and Europe and begin to rebuild valuable trading relationships.

It is possible a decisive military breakthrough by Ukraine or another domestic challenge to Putin’s authority, as we saw with the Wagner Group’s mutiny, could be enough to persuade President Xi to rein in his support for Russia.

Putin could struggle to sustain the war without Beijing’s support and be forced to surrender some occupied territory and try to negotiate peace terms. If China did turn its back on Moscow to rebuild trade with the West, we would expect global investors to return to Chinese stocks and for them to enter a bull market following three years of depressed performance.

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Super-computers power a medical breakthrough

Scientists are due to switch on Jupiter, Europe’s first exascale super-computer, this year. Exascale machines can perform one quintillion – which is one billion billion – computations per second. This is five times faster than previous super-computers.

The US already has one exascale machine and is due to switch on two more this year. China is believed to have two in operation.

Analysing vast volumes of data and making sense of complex genetic patterns, researchers believe exascale computers will drive significant medical progress, for example, enabling cancer specialists to predict significantly more accurately which drug will be most effective against a particular tumour.

We believe this weight of computer firepower could accelerate breakthroughs that result in revolutionary treatments, disease prevention methods and personalised medicine. In the event of a significant breakthrough by researchers in Europe then, as well as the huge benefits for humankind, we would expect European healthcare companies to pull European stocks to the top of the global equity leaderboard in 2024.

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Kosovo tensions escalate into new European conflict

Around 600 British soldiers have been deployed to northern Kosovo as part of a NATO peacekeeping force after tensions escalated with neighbouring Serbia.

In September, the US accused Belgrade of massing troops near the Kosovo border. Only days earlier, 30 heavily armed ethnic Serbs ambushed police in Kosovo in a town close to the border. One police officer and three gunmen were killed.

Serbia’s president Aleksandar Vucic says his country will never recognise the independence of Kosovo, its former province. Kosovo gained independence in 2008 after military conflict in the late ‘90s that resulted in NATO intervention. It has an ethnic Albanian majority except in the northern region.

Commentators have warned that with attention focused on Ukraine, the simmering tensions in northern Kosovo could easily flare up into a second military conflict in Europe.

“Resolving the dispute between Kosovo and Serbia is no longer just a political matter, but a serious security issue for the region and for Europe,” analysts from the European Council on Foreign Relations wrote in September.

A second military conflict in Europe would be likely to contribute to a rise in global spending on defence, resulting in continued strength for defence stocks.

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Artificial intelligence delivers a breakthrough on climate change

The United Nations climate summit, COP28, ended with countries agreeing to transition away from fossil fuels, raising the key question of which energy sources will be used in their place.

Scientists are using the rapidly growing power of artificial intelligence (AI) as they seek to unlock the potential of nuclear fusion as a source of safe and abundant carbon-free energy. In fusion, two atomic nuclei are combined to form a denser one, which releases energy in the same process that powers the sun. The potential advantages over existing fission reactors are huge, including no long-lived radioactive waste and no risk of a meltdown.

The stumbling block is controlling and containing plasma hotter than the surface of the sun created during the fusion process as hydrogen atoms are smashed together.

However, Google’s AI division, DeepMind, has already trained an AI system it says is capable of autonomously managing the process on a limited scale. With construction of the world’s largest experimental nuclear fusion reactor due to be completed in France in 2025, nuclear fusion is an increasing focus for AI. Given the exponential growth in the power and capabilities of AI, we believe this is an area where we could see a significant breakthrough. Any such news would send shares in energy-intensive businesses, such as AI companies, soaring, while spending on renewable energy sources, such as wind farms and solar facilities would decline.

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Risk Warnings

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting portfolios. Investments may include emerging market, smaller company and commodity funds which may be higher risk than other asset classes. Investments in fixed interest funds are subject to market and credit risk and will be impacted by changes in interest rates. Changes in exchange rates may affect the value of the underlying investments. Investments in Property funds carry specific risks relating to liquidity. Property funds can go through periods, known as ‘gating’, when it may not be possible to trade in or out of the funds and to access your money during such periods. The portfolios may invest a large part of their assets in funds for which investment decisions are made independently of the portfolios. If these investment managers perform poorly, the value of the portfolios is likely to be adversely affected. Investment in funds may also lead to additional fees arising from holding these funds.

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