A Spotlight On: Global Equities

Now that the asset management industry has had a chance to take stock of 2023, we asked Diana Philip from Baillie Gifford , Murdo Maclean from Walter Scott ( BNY ) and Ian Mortimer from Guinness Global Investors to discuss potential global equity opportunities in 2024 for our monthly “A Spotlight On” series.

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Their discussion revisited the tumultuous markets of 2023, and explored what factors will continue to plague investments in the coming year before explaining why active management will be of utmost importance given 2024’s likely market conditions.

The Global Markets in 2023

In 2023, at times, the markets seemed desperate to cling to good news - such as the possibility of central banks cutting interest rates. However, equity markets overall experienced positive returns. The MSCI, for example, produced almost 25% growth.

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There were two other notable characteristics of 2023’s performance. Firstly, the strong rally in November and December contrasted with earlier months’ downturns. Secondly, there was a large amount of volatility spurred on by short-term factors - for example, the US banking crisis in March 2023. Market concentration and #AI were two other themes that the market fixated on in 2023, which also brought challenges such as the valuations of prominent stocks like the Magnificent Seven.

Factors affecting 2024 markets

2024 markets will undoubtedly continue to be affected by the path of inflation and #interest rates. Caution about macroeconomic conditions will therefore persist in 2024, reemphasising the importance of identifying companies with balance sheet strength and the operational resilience to thrive in the evolving environment.

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At the moment, interest rate expectations vary when looking at economist forecasts versus central bank projections, and then, versus market consensus. There is an overall viewpoint, though, that leans toward a soft landing scenario with low positive economic growth against a backdrop of ongoing #inflation. This will likely result in yet more short-term fluctuations, so a long-term perspective will remain crucial when stock picking.

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Still, recognition why banks may cut rates will support better-informed investment decisions, especially in a post-pandemic environment. Currently, markets perceive rate cuts as a positive and are assuming that any normalisation of rates would be due to inflation finally coming under control. However, falling inflation can lead to lower revenue growth, potentially impacting companies’ profitability. Banks may, then, choose to cut rates hoping to boost growth because of weakening economies - not simply because inflation is at or around target levels.

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More broadly, 2024 and beyond looks set to have many other short-term factors causing market volatility too, not just inflation vs interest rates - for example, geopolitical tensions or the US presidential election. It is vital, in the face of these headwinds, to stick stringently to investment principles and processes, by remaining consistent in approach when conducting fundamental bottom-up stock selection.

2024 Opportunities

Since the end of COVID lockdowns, there has been a weakness in healthcare stocks, despite the attractive demographic backdrop. Now, healthcare emerges as a potential area offering investment returns despite post-pandemic bottlenecks causing issues alongside the higher interest rate environment troubling some companies in the biotech space specifically. Technology has the capacity to make huge changes in the area - such as with surgical robotics, minimally invasive approaches and advancements in gene and cell therapies. #GLP1 medicines, a form of diabetes medication which can also support weight loss,?will also continue to attract attention and has the potential to cause huge ramifications in the healthcare space.

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Looking at healthcare through a regional lens, the US is an obvious market full of opportunities. However, there are interesting investment prospects in other parts of the world that will increasingly struggle with ageing populations. Additionally, any outsourcing in healthcare will offer yet more investment opportunities due to the creation of efficiencies over the long term.

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Elsewhere, consumer staples could also be appealing and look to be undervalued. Despite not growing at the pace of other growth names, the sector has enjoyed positive EPS growth recently. Within the sector, European staples in particular look attractive.

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China will continue to receive attention, with negative sentiment on the region continuing to affect valuations. It begs the question; how cheap does it have to be for investors to take notice? It could be argued that even the slightest flicker in the improvement of economic data may encourage people to start investing in it, and emerging markets in general, again.

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In terms of impact investing in 2024, there are a number of diverse opportunities and attractive valuations for companies which could help drive societal change. For example, the company Remitly allows people living abroad to send money home safely and easily, addressing a real need amongst some of the world’s poorest.

Active management

With the current economic backdrop, active management should prove its worth in 2024. Even if it comes at a slight premium over passive investing, active managers have the ability to deliver performance in both rising and falling markets. That’s because, in a volatile environment, where the path of interest rates is uncertain, picking quality businesses that are resilient during any market conditions is key for returns. When times are good, these companies are able to grow, but crucially during a downturn, they have a financial profile which is able to cope. Given the last decade has allowed many businesses to emerge, thanks to artificial financial conditions, there will undoubtedly be a greater dispersion of companies that thrive and those that will struggle.

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Looking at income strategies specifically, active management can be far more potent than passive income investing. The nature of passive income investing can lead to high concentrations in certain sectors which often have the highest volatility in dividend payments. Through active management, constructing a portfolio that produces a regular, stable income stream is possible and can add a great deal of value.

Finally, robust fundamental company analysis is always crucial, regardless of the macro environment, so any market jitters provide an opportunity for active managers. Those who stay consistent and committed to their investment philosophy can purchase mispriced stocks which meet their definition of quality. It offers the chance to select companies that are well run, well capitalised and reinvest in themselves to cement their competitive advantage.