Chris Salih – Fund Calibre

2 January 2024

After a period when markets were preoccupied with the minutiae of inflation data and central bank decision-making, the last two months of 2023 gave a hint that the year ahead could be different. Markets rallied, and leadership broadened out. It is a welcome shift for investors from the AI-or-bust approach and could see more appetite for a range of themes in the year ahead.

The dominance of the AI theme in 2023 has been well-documented. The ‘Magnificent Seven’ (M7) (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have done the hard graft for investor returns, while the remainder of the market has been lacklustre.

The S&P 500 equal-weight index returned 13.9%* over the year, compared to 24.2% for the standard S&P 500 index**, where the technology giants have a far greater impact.

Most believe that this dominance will not continue in 2024. Ben Leyland, manager on the JOHCM Global Opportunities fund, says: “The global index remains distorted towards the winners of the last cycle, particularly a handful of names in the US tech sector, which enjoyed an AI-driven ‘echo boom’ in the first half of 2023. Digitalisation still represents a significant weight in the MSCI ACWI, and valuations in this part of the market look stretched to us.”

That is not to say that these are weak companies, or that AI growth will stall in the year ahead. 2024 could be the year in which AI technology goes mainstream as companies find increasing uses for it. However, Mark Hawtin, manager on the GAM Star Disruptive Growth fund, says the winners will come from below the M7 names: “The artificial intelligence healthcare, storage, and Software as a Service (SaaS) themes will drive the best returns.”

The Guinness Global Innovators fund, for example, has exposure to AI, but also to a range of other themes***. Its technology holdings also include media & entertainment, robotics and automation, plus fintech and the internet of things. These areas may start to get more attention as investors have greater certainty about the economic environment and direction of interest rates.

Beyond technology

Healthcare is also an important area of focus for many managers this year. Anti-obesity medication has taken a leap forward in 2023 with the success of Novo Nordisk’s Ozempic drug, and there has also been significant progress on Alzheimer’s treatment. At the same time, the growth of mRNA technology and the development of precision medicine – personalised for each individual – promises to revolutionise patient care.

Gareth Powell, manager of the Polar Capital Global Healthcare Trust, gives an overview of the long term investment case for weight loss drugs in a recent video short.

In its 2024 update, Capital Group points out that AstraZeneca, the British-Swedish COVID vaccine developer and maker of lung cancer treatment Tagrisso, has invested aggressively in research and development, resulting in a deep pipeline of oncological and rare disease therapies in late-stage development****. This channel of innovation may prompt investors re-examine the sector in the year ahead.

Better time for renewable energy?

It has been a tough period for the renewable energy sector. The offshore wind sector has been hit hard by rising costs, and companies have had to abandon high profile projects. Demand for electric vehicles has been weaker. However, the sector has performed strongly amid the recent rally and may be set for a better 2024. There continues to be real innovation in sustainable technology, including areas such as energy storage solutions, and the problems of environmental destruction remain as pressing as ever.

Ben Leyland adds: “The consequences of long periods of underinvestment are now starting to be addressed, particularly in energy security and supply chain resilience. These beneficiaries could be found in ‘real world’ sectors like industrials, infrastructure and materials, which will likely see their quality and growth characteristics steadily re-evaluated over the medium term.”

Who are the wildcards?

There are two other major themes likely to dominate next year: the global election cycle, with almost half the world’s voting population going to the polls, and any potential revival in China.

Rob Lovelace, an equity portfolio manager on the Capital Group New Prospective fund, is sanguine about any political noise: “While markets can be volatile in election years, for long-term investors, which political party takes the White House has had little impact. Since 1936, the 10-year annualised return of US stocks (as measured by the S&P 500 Index) made at the start of an election year was 11.2% when a Democrat won and 10.5% in years a Republican prevailed.”

While Mark Hawtin believes China could be a wildcard: “Valuations have sunk to ridiculously low levels. Efforts to stimulate growth in the Chinese economy against a backdrop of ultra-low inflation should be rewarded with outsized returns in equities.”

Ultimately, it could be a far more interesting year in 2024, with market returns spread more widely. However, should investors get spooked – perhaps by a rogue inflation report or vacillation from central banks, – they could retreat to the familiarity of big tech. Investors may need to be ready for either scenario.

*Source: S&P 500 Equal Weight Index Factsheet, 29 December 2023
**Source: FE Analytics, total returns in US dollars, 1 January 2023 to 29 December 2023
***Source: Guinness Global Investors, Webcast Q3 2023
****Source: Capital Group, 2024 Outlook

Please Note:

This article was first published by Fund Calibre and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. 

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