Year-on-year inflation has come down significantly in the second half of 2023, and earnings have surprised the market by consistently beating expectations, creating a positive environment despite the challenging macro backdrop. In addition, themes have continued to generate tailwinds for global equities.
Artificial Intelligence (AI), onshoring, and wellness & beauty continue to provide strong thematic tailwinds and have propelled a number of market leaders.
Key opportunities for 2024
This year, a key opportunity will come from the disconnect between earnings and market growth expectations. There are companies across the global equity landscape that haven’t experienced earnings downgrades, yet the market is forecasting their growth to slow considerably. Many of these names have more structural drivers than cyclical ones, even if there is some element of cyclicality in their models, meaning they could well surprise to the upside as we progress through 2024.
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The consumer sector hosts many examples, with two that sit within our ‘millennial consumer’ portfolio theme being Ulta Beauty and American Express. Both are trading at close to trough valuations on the belief that growth has peaked and will slowly contract. We do not share this view and instead expect as we move to peak rates for growth to hold up and these stocks to re-rate.
Onshoring should remain a major tailwind going into 2024. The US has approved a $1.2 trillion stimulus package in the form of the Infrastructure Bill. Some $300 billion has already been ear marked and should provide support to many industrial and construction companies and those providing consulting to these projects. There have been some gains on stocks in these areas early last year, but these have since consolidated and we expect to see a significant step up in activity by the second half of 2024.
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We also expect to see continued momentum in our ‘health & wellbeing’ theme, notably in the areas of diabetes and obesity treatments. These have seen a major inflection fuelled by the Novo Nordisk game-changing Wegovy weight loss drug. Supply remains constrained and there is excess demand for the drug. We expect Novo Nordisk to continue to see outsized growth, and industry peers launching similar treatments should also benefit.
The other area worth highlighting is automation where inventories have normalised and we are close to the bottom of the cycle, so the market should look ahead and see that these companies are well positioned for the next cycle.
In AI, we expect to see greater divergence between winners and losers this year, with performance favouring names that are true beneficiaries. NVIDIA has enjoyed tremendous first-mover advantage, but over time, we expect other winners to emerge.
What surprises could this year bring?
In terms of positive surprises, one could be a sharp fall in inflation. While this is certainly possible, the risk is that specific areas, like shelter, could stall a decline as rents remain high and there is a shortage of affordable housing. Conversely, inflation could also deliver a negative surprise if it proves sticky and demanding of further rate rises, taking us into a hard-landing scenario. But our expectation is for a positive inflation outcome and we are positioned accordingly.
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Elsewhere, we expect the influence of the ‘Magnificent 7’ to become more nuanced. Microsoft will likely remain a lead name, supported by growth in the Azure cloud business and the approval of the Activision Blizzard deal. We see more quarters of growth ahead for NVIDIA and we believe Amazon is well positioned to strengthen, while Tesla will likely require an inflection in economic data to strengthen materially.
We expect the market to continue to broaden out this year, as it did in November last year. Overall, the market has been narrow and driven by a handful of tech names. As liquidity improves, we expect the number of winners to increase and we see attractive entry points in multiple areas, especially consumer cyclicals that have structural stories.
Anu Narula is head of equities at Mirabaud Asset Management
