Investment Trends for 2024: Navigating a Shifting Landscape

2023 has proven to be a year of big challenges, with wars in Ukraine and the Middle East, high inflation, and rising interest rates.? In Australia, the rising cost of living and the looming "mortgage cliff" have heightened people's worries about their financial well-being.

Nevertheless, individuals investing in the stock market experienced minimal downturns despite these challenges. This was partly attributed to certain anticipated issues, such as the "mortgage cliff," not materialising, and China maintaining substantial purchases of resources from Australia.?Consequently, iron ore producers, Rio Tinto and Fortescue saw their stock prices reaching all-time highs in 2023. The mining sector was a major contributor to the Australian share market return, returning almost 6% for the calendar year, as of December 18. ?The Australian market hasn’t fared as well as Wall Street, with the major US share price index (S&P500) up 23% YTD.

Investors are quickly realising new opportunities due to higher interest rates and nature-related risks, along with other new trends. In these fast and hyper-aware times, opportunities can show up and disappear quickly. Investors need to be flexible in how they approach things to take advantage of these opportunities. Now, we're in a time where being nimble and flexible is important for how investors make decisions.

In this kind of situation, it's crucial to understand the main trends that are shaping markets. I think the best way to do this is by using different frameworks or themes to understand the market, and I’ve outlined six of my top themes for investment for 2024 below.

Theme 1 – Security and sustainability

In the dawn of a new era marked by a retreat from globalisation, the investment landscape is witnessing a transformative shift. This alteration is poised to induce scarcities in raw materials and goods, prompting a re-evaluation of manufacturing strategies.

The re-shoring and near-shoring of production, particularly in critical sectors like semiconductors, are gaining traction to fortify supply chains. The emphasis on securing strategic resources has become imperative, meaning that investors can explore opportunities in:

• Technological automation.
• Robotics and automation within novel manufacturing facilities.
• Technology security sectors, encompassing cybersecurity, semiconductors, satellite technology, and networks.
• Food security and water efficiency, including investments in irrigation, clean water production, agri-tech, and innovative fertilizers.
• "Middle power" countries such as India, Brazil, Mexico, Indonesia and Australia

Theme 2 – Riding the energy transition wave

The momentum behind the global energy transition continues to surge. Key to this transition is electrification, paving the way for a gradual departure from fossil fuels. Government incentives and regulations are crucial drivers, encouraging substantial upfront investments in electric infrastructure, spanning power generation, transmission, and storage. Energy efficiency remains a focal point, as economising energy proves more cost-effective than production.

Investment avenues in this theme include:

• Decarbonisation initiatives, focusing on renewable energy production and storage, as well as technologies for carbon capture and recycling.
• Electrification, involving high-voltage electrical equipment manufacturers, critical metals for electric vehicles, and large-scale industrial electricity storage.
• Energy efficiency solutions, such as insulation, efficient LED lighting, smart control systems, lighting and signalling software, and smart glass.

Theme 3 – Diversifying beyond mega-caps

Amidst a stock market landscape dominated by a handful of mega-cap technology stocks, diversification is gaining prominence. The concentration risk posed by the so-called "Magnificent Seven" (US mega-cap technology leaders) echoes historical warnings from the technology bubble of 2000.

The "Magnificent Seven" mega-cap stocks — Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Amazon (AMZN), Meta (META), Nvidia (NVDA), and Tesla (TSLA) — heavily influenced this year's market rally, constituting 28% of the S&P 500. Debate surrounds their future, with some analysts cautioning they could be among the worst performers in an upcoming recession and advising on diversification into an equal-weighted basket. Other analysts, however, predict continued outperformance by the mega-cap group, citing favourable growth for 2024.? My views on this are mixed so feel free to drop me a line for further discussions or to hear my views.

To mitigate the risk, investors are encouraged to explore sectors and industries poised for substantial gains from AI applications. Potential investment areas include:

• Global stocks excluding the US, spanning Eurozone, UK, Japan, and emerging markets.
• Underlying technology required to power AI, such as semiconductors, cybersecurity, cloud computing infrastructure, data centre infrastructure, and real estate.
• Healthcare, professional services, and industrial automation.

For clients that are looking for exposure to small caps In Australia I’ve been considering investing in the Regal Investment Fund (RF1). ?The fund provides investors with exposure to a selection of alternative investment strategies, with an objective to produce attractive risk-adjusted returns over a period of more than five years with limited correlation to equity markets.

Anecdotally there is evidence to suggest that small caps tend to perform better than large caps in cycles and we are now reaching that point where we think this will happen. Where appropriate we may rotate an allocation of funds out of large cap Australian Equities and direct these funds into this small cap fund.

For exposure to global small Caps you could consider the VanEck QSML ETF which gives investors a diversified portfolio of 150 international developed market small-cap quality growth securities.

Theme 4 – Navigating societal and health shifts

The confluence of the Covid-19 pandemic, demographic changes (with the population over 60 expected to double by 2050), and the surge in obesity since the mid-1970s has heightened awareness of wellness.

This paradigm shift presents investment opportunities in sustainable and healthy eating, wellness technology, medical innovation, and pharmaceutical advancements, including weight loss drugs.

Additionally, pharmaceutical companies like Eli Lilly and Novo Nordisk focusing on obesity drugs may offer intriguing investment prospects. The wellness revolution presents a landscape of volatility, disruption, and opportunity for savvy investors.

Theme 5 - Change in traditional asset allocation

The primary driver shaping the economy is the interplay of government fiscal and monetary policy, impacting various sectors such as consumer spending, wages, productivity, business costs, and profits.

Predicting a specific direction is challenging, and my anticipation is that substantial volatility will persist throughout 2024. I suggest considering investing in alternatives, private equity, precious metals, commodity funds, hedge funds and credit to assist in diversifying your current portfolio.

I attended a Morgans breakfast briefing in December 2023 where the portfolio manager Mark Landau presented on the L1 Capital Long Short Fund.

Some key points included that the fund is not market correlated, it's a way of diversifying your portfolio. Their investment approach has three key principles:

1. Valuation and qualitative factors are the key drivers of long-term share price performance. Both factors are critical and of equal importance.

2. Markets tend to be emotional, short-term and backward looking. Markets continually present opportunities to investors who are unemotional and long-term in their assessment of business potential.

3. An intensive visitation schedule with a wide variety of stakeholders can provide a more complete perspective of a company’s prospects.

For more information, download the Product Disclosure Statement or their latest report - November 2023.

Theme 6 - The Australian Dollar

The AUD's performance in 2024 hinges on various factors. As one of the most traded currencies globally, its value impacts individuals, businesses, and governments. Exchange rates are volatile, influenced by Australia's interest rates, inflation, terms of trade, and risk sentiment.

Short-Term Outlook:

Leading into 2024, most banks forecast the AUD to rise, influenced by interest rates, commodity prices, and risk appetite. Short-term value is driven by changes in risk sentiment and speculation about currency movements, with the AUD responding to global equity market shifts.? The December quarter has seen the AUD rise 4.3% above the USD.

Long-Term Drivers:

Interest rate differentials and Australia's terms of trade are key for the AUD's long-term value. RBA's rate decisions and terms of trade affect demand. Australia's exports, mainly commodities, tie the AUD to global demand.

2024 Predictions Against Major Currencies:

Interest rate differentials play a crucial role. Analysts anticipate a contraction in the interest rate differential, supporting the AUD against the USD, EUR, and GBP in 2024. The AUD is expected to remain relatively flat against the NZD. Japan's interest rates are anticipated to increase, likely causing a slight decline in the AUD against the JPY, though uncertainties persist due to the Bank of Japan's historical cautiousness.

In summary, the AUD's trajectory in 2024 will be shaped by a blend of economic indicators, interest rates, and global market dynamics.

To invest in the anticipated rise of the Australian Dollar, I would recommend Betashares ETF AUDS, which aims to provide geared exposure to changes in the value of the Australian dollar against the US dollar. Please feel free to contact me regarding this as this style of investment is quite complex.

As we come to the end of a year that has presented challenges in many areas, it is timely to reflect on what is important – family, friends and good health.

I wish you all the very best for the coming holiday season and look forward to 2024 with a genuine feeling of hope and promise. As always, feel free to reach out to me to discuss your investment strategy for 2024 and beyond.

General Advice Warning: Morgans Financial Limited (Morgans) and its associates may hold securities in the companies/trusts mentioned herein. Unless otherwise stated any advice contained in this article is of a general nature only and has been prepared without taking into account your relevant personal circumstances. Those acting upon information contained in this article without first consulting one of Morgans investment advisers do so entirely at their own risk.

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