We believe an unpredictable political and macroeconomic landscape sets the scene for substantial risks and opportunities for investors throughout 2024.
Australian value equities
Dougal Maple-Brown, Head of Australian Value Equities at Maple-Brown Abbott, says 2023 highlighted how difficult economic forecasting is and 2024 may well prove similarly chastening for forecasters.
“COVID ensured we have a set of economic circumstances unlike perhaps any we have seen before and thus it is important not to rely overly on past outcomes as we seek insights. The overwhelming risk is that economic conditions turn out worse than expected. The best-case scenario seems largely priced into markets.
“It is difficult to conclude anything other than most of the potential gains of 2024 were pulled forward into 2023, and thus we believe the market returns in 2024 will at best prove tepid, if not disappointing. If that is the case then it is also likely that the stocks that have propelled markets to highs will disappoint, which should support the performance of contrarian, value-oriented managers,” Mr Maple-Brown said.
Australian small companies
“We believe the Australian small caps market is at an inflection point given the more favourable macro-economic backdrop and expected earnings trajectory,” says Phillip Hudak, Co-Portfolio Manager, Australian Small Companies.
“With a lot of negative sentiment ‘priced in’ to Australian small companies, and signs that financial conditions are easing, inflation is moderating and interest rate rates have peaked, we believe we are seeing one of the most favourable environments for the Australian small caps market to outperform in 2024 since the global financial crisis,” Mr Hudak said.
Matt Griffin, Co-Portfolio manager, Australian Small Companies, agrees, and points to key themes that may emerge in small caps in 2024.
“While our bottom-up investment process is focused on idiosyncratic exposures, key themes we may see in 2024 include the under-estimation of wage inflation, a ramp-up in corporate activity, strengthening fundamentals in the uranium sector and potential re-emergence of the gold sector,” Mr Griffin said.
Global emerging markets
John Moorhead, Head of Global Emerging Markets, says several factors point to a stronger year for global emerging markets in 2024. A likely peak in interest rates, attractive valuations and higher rates of economic growth should see capital flow to select emerging markets further ahead in the economic cycle.
“Emerging economies have generally been ahead of the curve in fighting inflation, helped by moving early with rate rises and maintaining fiscal discipline. That leaves many emerging market governments and central banks well placed to stimulate for growth.
“For example, Brazil was one of the first central banks globally to raise rates and is now in an easing cycle. With a balanced federal budget, still high real rates and a stock market trading around 8x forward earnings, we believe Brazilian equities are well placed for further gains.
“For the first time in close to two years, the broad emerging markets index is seeing a sustained lift in the outlook for earnings. At the bottom-up level, we are uncovering exciting opportunities in companies that are already reporting strong fundamentals,” Mr Moorhead said.
Will Main, Head of Asia, believes Chinese equities remain a contrarian opportunity and confidence could return to the market in 2024, where valuations are within 10 per cent of their 20-year lows.
“Three years of equity market declines have left the market cheap, unloved and under-owned. From an equity market return perspective, experience tells us that things only need to be ‘less bad’ to see animal spirits kick in and stock prices move higher.
“We are optimistic on the outlook for China and believe there are a number of attractive opportunities for investors.”
Mr Moorhead believes political events in emerging markets may create idiosyncratic investing opportunities.
“Emerging markets face a busy election period over the coming 12 months. Taiwan, Indonesia, India, South Korea, South Africa and Mexico are all expected to hold elections before the end of 2024. In our experience in emerging markets, uncertainty arising from campaign policy announcements as well as the election results can create shorter term market volatility, which can result in longer-term investment opportunities.” Mr Moorhead said.
Mr Moorhead and Mr Main agree that artificial intelligence (AI) will be an increasing influence on daily life, however at a stock level, investor exuberance points to the need for caution.
“AI was a major reason why Taiwanese equities performed strongly over 2023. However, there are signs that near-term expectations have moved ahead of what can (or will) be delivered. Taiwanese mid-caps, which contain a large exposure to the AI thematic, rose more than 40 per cent in 2023. Forecast earnings for this cohort were largely unchanged and multiples now sit at 15 year highs, leaving little margin of safety,” Mr Main said.
Global listed infrastructure
Justin Lannen, Co-Founder and Portfolio Manager, Maple-Brown Abbott Global Listed Infrastructure, says there is much to think about in geopolitics and macroeconomics in 2024 and it is unlikely to be a stable year.
“Real yields have recently reduced and the global economy looks to be slowing which should benefit defensive essential service assets like infrastructure relative to more economically sensitive asset classes.
“Inflation, while declining and is in our view mostly under control, is looking more unpredictable than in the pre-COVID years and we maintain the belief that the embedded inflation pass-throughs in infrastructure will remain a valuable feature of the asset class,” Mr Lannen said.
Steven Kempler, Co-Founder and Portfolio Manager, Maple-Brown Abbott Global Listed Infrastructure, says investor focus should remain on infrastructure assets that generate inflation-linked cashflows through both good and bad economic times.
“We continue to favour monopolistic infrastructure assets that are trading at attractive discounts to our internal valuations, protected by regulation or strong contracts, coupled with inflation linkage,” Mr Kempler said.
Andrew Maple-Brown, Co-Founder and Managing Director, Maple-Brown Abbott Global Listed Infrastructure, says separate to nearer-term political and economic swings, large amounts of capital investment is needed over coming decades by both private infrastructure owners and governments.
“We believe the key opportunities are in listed infrastructure companies that play a role in themes such as the energy transition, electrification of society, water, transport mobility and digitalisation,” Mr Maple-Brown said.
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