Jonathan Boyd
19th December, 2023
12 MIN READ
Members of the Group of Boutique Asset Managers (GBAM) - a global network of like-minded, independent specialist asset managers operating on five continents - have issued their 2024 outlook identifying a blend of rates uncertainty but opportunties in areas such as emerging markets and use of active management to blend asset classes.
Continued retreat from peak inflation and interest rates are central to expectations. The uncertainty element around rates is whether they may be held at levels that spark a soft landing, if not a recession in certain developed markets. But at the same time there is a sniff of opportunity: Emerging Markets could be winners from US Fed rate cuts alongside local elections leading to policy changes and economic reform.
The political factor looms large, with more than half the World's population going to the polls through 2024, while ongoing conflicts in Europe and the Middle East in particular pose threats to food and energy prices.
The continued march of technology, digitisation and Artificial Intelligence notwithstanding, the reduced likelihood of the Magnificent Seven accounting for such a large share of stock market returns will put the spotlight on active management amid recognition of valuations in traditional asset classes and opportunities in diversification into alternatives and convertible bonds.
In Edinburgh, Scotland, Andrew Ward, Chief Executive Officer at Aubrey Capital Management, the specialist global manager, says: "The three global factors that will most likely affect our business in 2024 include a normalising of global inflation and interest rates, putting cash back in the pockets of ordinary consumers, thereby boosting the revenues of the sorts of companies in which we invest; the ratcheting back of inter-state conflict and the threat of such, creating more stability for trade to flourish and ordinary humans to live their lives, travel and spend hard-earned cash as they wish; and the sensible development and growth of AI (and other appropriate tech) that benefits modest businesses like ours, allowing us the scope to do more routine data processing (of various types) inhouse, thereby depending less on expensive near-monopolistic ‘providers', ultimately allowing us to dramatically reduce fees and improve net returns to our clients."
"We're looking forward to seeing the developments in these key areas and believe 2024 will be a prosperous year for our business and partnerships, and a better year in general for the industry."
In Stavanger, Norway, The Chairman of GBAM and Chief Executive of SKAGEN Funds, Tim Warrington, opines that: "This year, in contrast to last, the consensus seems to be a soft-landing over recession; albeit with most hedging, noting that much needs to continue to go right to both deliver and sustain it."
Putting aside elections on both sides of the Pond, where Tim sees too much at stake to expect significant policy changes, he says: "The narrow basis to success in 2023 - the AI-charged Magnificent Seven delivering more than half the market gains - will not endure ad infinitum. And interest rate tops in the developed markets will be supportive to emerging markets. So active managers should have advantage, especially those investing in small- to mid-caps and further afield."
"What the unknown unknowns might be is another matter, so my advice remains the same: know your fund manager well and run sensibly diversified investment portfolios."
Also in the Europe region, MAPFRE's Chief Investment Officer José Luís Jimenez in Madrid, Spain, and Co-Founder of GBAM, echoes the points of both of politics and uncertainty when he says: "History, like economics, is cyclical and bearing in mind that next year more than half of the population of the World will go to the polls, despite many of the ballot results being already known, uncertainty is all over the place However, most investors are suffering some kind of Peter Pan Syndrome: ‘A soft landing lies ahead, and it will be excellent for stocks and bonds'; ‘Interest rates cuts are around the corner next year and thanks to a strong labour market, Covid´s savings and cheaper finance, the World economy will do well'. But all experienced economists know that predictions are one thing and reality another. Many things could go wrong next year."
"High fiscal deficits and high national debt are big problems to sort out for most developed economies. The War in Ukraine and in the Middle East -- beyond the enormous human tragedy -- have their implications too in terms of food and energy prices."
Shifting the spotlight away from developed to emerging markets, there are signs that investors may come to appreciate this sector more than has been the case in recent years.
Reflecting on the relative opportunities for emerging markets, Ladislao Larraín, Chief Executive Officer at LarrainVial AM, the largest non-banking asset manager in Chile, based in Santiago, says: "The shift in the Federal Reserve's monetary policy cycle is key to improving asset returns in emerging economies. The accelerating decline in inflation in the United States and globally has made it likely that the Fed's rate cuts are likely to materialize before mid-2024. In this context, we are highly optimistic about political and macroeconomic developments in Latin America, where recent elections have been won by pro-free-market forces. This, coupled with very negative poll standings for most of the leftwing coalitions in power, promises to reverse the pink tide in the region. Additionally, the region's countries have favourable macroeconomic stories such as the agro- and oil export boom in Brazil and nearshoring in Mexico."
"In a context of elevated global geopolitical risks, Latin America offers a significant option for assets in a region that looks more stable, with many orthodox central banks that raised rates early and now will lead the easement process, in addition to having democratic institutions that have shown their strength in recent history."
Charles Ferraz, Chief Executive Officer at the New York-based investment boutique Itaú USA Asset Management says: "Looking ahead to 2024, the US markets remain influenced by interest rates fluctuations, government spending, and potential election-related volatility. Caution is advised for the US equity markets, but emerging market equities should benefit from the scenario. In Brazil, the markets anticipate potential gains as global interest rates fall, combined with the ongoing local adjustments. With a robust current account, favourable geopolitical positioning, and growing capital markets, Brazil becomes an attractive destination for investments. However, the fiscal deficit continues to be a challenge. Overall, this dynamic sets the stage for optimism in both the stock market and the local currency (BRL)."
"The only certainty we have about the outlook is that surprises are inevitable. Hence, the crucial focus on diversification, resilience, and seizing opportunities persists. Investors must meticulously construct portfolios and allocate resources wisely, prioritizing professionals showcasing expertise in navigating the complexities of dynamic and volatile markets."
From another emerging market region, Hlelo (Lo) Nc. Giyose, Chief Investment Officer & Principal at First Avenue Investment Management, the long only equities specialist manager based in Johannesburg, South Africa, spots similarities in that that local developments in policy could have a significant impact on return expectations, as the country's GDP has been in decline since 2011 even as it faces a rampant public service wage bill funded by debt that has reached a limit.
"It is time for the 33% of unemployed South Africans to go back to work (productively) to drive both pension fund flows and economic growth per capita. The reason we are pointing this out is that 2024 is a watershed year where the governing party, the African National Congress, is projected to lose its majority in government. The country can now focus on reforms from parties that have been critical of the economic malaise of the past 13 years."
"We think we are past the worst, (rising rates), and the odds are favourable for a soft landing in the developed world. We see commodity prices stabilising, Emerging Market currencies stabilizing after a year in which they went into freefall, and government financing costs stabilizing. All of these would bode well for cyclical asset classes that drive wealth creation in South Africa (property, equities, and bonds)."
Over in Hong Kong, Ronald Chan, Chief Investment Officer and Founder of Chartwell Capital, the independent asset manager focused on China's Greater Bay Area and the Asia-Pacific region, identifies elections next year in Taiwan and the US presidential election as particularly important events affecting the local business environment, along with rates decisions by the US Fed affecting asset prices and stock markets in Asia. The possibility of a global economic slowdown "could pose challenges for companies in Hong Kong, however, it's important to note that challenges are often accompanied by opportunities, and businesses that can adapt to changing market conditions may find new avenues for growth and innovation."
The local market faces specific conditions: valuations of Hong Kong local stocks are at their lowest in 30 years; dividend yields are in many cases at their highest, ranging from 8%-11%; and while foreign capital has been cautious due to concerns around China, mainland Chinese capital may be overlooking local businesses.
"While Hong Kong may face challenges such as geopolitical uncertainties, interest rate fluctuations, and a potential global economic slowdown, there are opportunities for value investors in the local stock market. The low valuations, high dividend yields, and overlooked nature of Hong Kong local stocks present a safe haven for investors seeking sustainable cash flow and reliable management in 2024."
Another way to approach uncertainty is to consider asset class allocations. Members of GBAM have identified a number of opportunities emerging into 2024 despite identified risks stemming from the ongoing macro environment, particularly uncertainty around the pace of change in interest rates.
Paulo Del Priore, Partner at Farview, the global multi-strategy investment manager with offices in London, UK and São Paulo, Brazil, highlights that amid a global investment landscape still marked by increasing complexity, heightened geopolitical tensions, and volatility, there is a shift in the correlation between equity and bonds, which, he says: "Challenges traditional investment approaches, such as buy-and-hold, underscoring the importance of incorporating alternative risk premia strategies into traditional portfolios. In 2024, we anticipate wider spreads in absolute returns, contributing to a more positive outlook."
"Our key strategies for navigating 2024's complexities include prioritizing liquidity to facilitate rapid liquidation of significant portions of our portfolio when necessary; constructing a portfolio with low-beta, market-neutral, and uncorrelated assets, aligning with our goals of capital preservation and diversification in an unpredictable market; and as the dispersion of performance in alternative strategies continues to increase, we believe selecting and combining the right specialists/ investment teams will be crucial."
In Zurich, Switzerland, Dr. Pius Fisch, Chairman of Fisch Asset Management, a global leader in convertible bonds, says that amid a "tug-of-war" between increasing risk of recession and simultaneously falling interest rates "we believe that 2024 will be a promising year for fixed income, and for EM corporates in particular."
"Investment-grade corporate bonds should be able to benefit strongly from an easing of monetary policy, but high-yield companies should also stand to gain from potentially lower refinancing rates. In addition, solid fundamentals and continued low default rates represent a robust backdrop. In the emerging markets complex, we also see very attractive carry for higher-quality companies with strong balance sheets and short maturities."
"We anticipate strong performance from convertible bonds in 2024, both on an absolute basis and relative to equities and fixed income. The asset class offers significant convexity and positive yields, providing advantageous upside capture in our baseline scenario of a normalisation of the financial environment. Many convertible bonds are trading close to the bond floor, reinforcing their resilience against a potential further deterioration in economic conditions. This scenario could materialise in the first months of 2024. The catch-up effect of small and mid-caps, coupled with the support from lower rates and an increase in primary market activity, are likely to serve as positive drivers for the asset class throughout the year."
And from Francisco Rodríguez d'Achille, Partner & Director of Lonvia Capital, the small- and mid-cap company specialist based in Paris, France, comes thoughts that: "Like in 2022, so far this year 2023 has left a significant de-rating in our portfolio in terms of valuation. A pause in the interest rate policy by the central banks will bring a return to fundamentals and with it a strong revaluation of companies that are growing structurally without depending on exogenous factors, despite the fact that they have been heavily punished in terms of price and valuation."
Today there is still a significant distortion, which reinforces our thesis that if the central banks relax the message, we could find ourselves facing a historic opportunity for the coming months in our strategy. The most penalized sector in 2023 is Medical Technology; we are identifying encouraging signs from some leading companies within this segment. The Semiconductors segment continues to be driven by needs in terms of Artificial Intelligence, data storage (data centers), computing power, and energy transition. In the field of Industrial Software we have recently introduced a new company in the segment of Construction Software. For Industry 4.0 and Automation we are in the Intralogistics Automation segment.
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