TOL - 12th Jan, 2024
Move over Magnificent Seven!
Why these three global stocks look more attractive in 2024
In anticipation of a soft landing, stocks staged a rally in late 2023 to compound the gains that were already seen earlier in the year.
The problem for investors is that these gains were made primarily by just seven stocks. For the bulk of the stock market, the returns have been uninspiring at best.
But we also think that the best opportunities now lie in a select few of these underperforming names.
What characteristics are important to global stock investors?
I think it's important that investors understand how much divergence there was in the performance of stocks last year. The following chart of the S&P 500's returns (in equal-weight and capitalisation-weight form) represents this.
For investors, I think this is both the risk and the opportunity. I think the risk is mainly in those stocks that did well last year, and the great opportunity is in the many stocks that struggled.
Traditionally, these indices track each other pretty closely. You may get a bit of a divergence here or there but last year saw a difference of around 10%. This just tells you what was driving equity markets last year.
What stands out to us from 2023 and how does that affect our outlook for 2024?
The big story of 2023, which we think will continue into 2024, is this historic rise in interest rates. It's the biggest tightening cycle in several decades and the sharpest (see next chart). Interestingly, we're only at 20-plus months since that first Fed rate hike of March 2022 and the rule of thumb historically has been you need to wait 18 to 24 months to see that economic and earnings impact.
For example, in industrial stocks globally, we're only just starting to see CEOs talk down their profits or have slightly disappointing results. Stocks that are seen as economically sensitive have generally done poorly and everyone has crowded into those short bets.
I think this continues to be the story for 2024 but just how big an impact are rates going to have on market earnings?
Where are the biggest opportunities likely to come from?
We think the best opportunities will be found in developed markets ex-US, and emerging markets. You want to go to the places where the damage is already done.
The top of that list is China. The fall in property sales and prices has crushed consumer confidence in that country - as the chart below shows.
This also means stock prices have had an enormous adjustment. If you were to look at the equivalent of the Magnificent Seven in China from two years ago - which includes companies like Tencent, Alibaba, JD, and Meituan - in some cases, their earnings are still growing and in others, they've slowed down.
What are the biggest risks?
The biggest risk is the potential for a deep recession in the US. If that traditional relationship with interest rates does play out, you can expect earnings to be under real pressure and take the whole market down with it.
Recently, the market has also become comfortable with the idea that rates might get cut. Investors have seen a lot of the speculative stocks of 2021, many of which have seen 50%, 70%, or even 80% rallies. But many also have no business model, or some have a business model but they're still struggling to get to profitability.
Three high conviction stocks for 2024
- TransUnion (NYSE: TRU): One of the major credit bureaus in the US. Mortgage applications are down over 90% because of the huge rise in interest rates, while credit card applications and car loans are weakening. The business has had a setback in its earnings, but it also now trades at 15x earnings. I think it's an outstanding opportunity for the next three to five years.
- Allfunds Group (AMS: ALLFG): A European fund platform that people invest through - though it's more like a Visa or Mastercard. This is a high-quality business and they earn their revenues from the value of the assets. However, a large part of the value of those assets are bonds and there's been a historic bear market in bonds. But once we get through this bear market, assets and earnings will start to build again.
- CATL (SHE: 300750): Recently, everyone has been fearful of the discussion that electric vehicles are starting to mature in markets like the US and Europe. But in China, EVs are booming. Our focus there is CATL, which is the global leader in batteries and renewable energy storage, and you can buy at just 15x earnings. While it may not grow at these historic rates any more, it's still an exciting opportunity.
Why should investors consider global equities above all others in 2024?
I don't think they should. I think you want to be there selectively because there are risks in parts of the market. You need to be careful about the prices you're paying.
Having said that, at this point in the cycle, one of the things investors tend to get overly focused on is other asset classes like cash and private credit that can reap 5% and 8-9%, respectively. I think the problem with that is that it is a short duration of 12 months or less. But the very fact interest rates are there is why a lot of companies are trading cheaply.
Note: This piece contains excerpts from a video interview I conducted with Livewire's Hans Lee as part of Livewire's Outlook Series 2024. You can watch the full video interview here:
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Andrew joined Platinum as a founding member in 1994 in the capacity of director and Deputy Chief Investment Officer. Previously he was a Vice President of Bankers Trust Australia covering Asian equities and managing the BT Select Market Trust - Pacific Basin Fund.
In May 2013 Andrew was appointed Chief Investment Officer (CIO). Andrew was the portfolio manager for the Platinum Asia Fund until December 2014 and is co-manager of the Platinum International Fund. In July 2018 Andrew was appointed CEO (General Manager) of the Platinum Group. Andrew assumes this role in addition to his CIO role and portfolio management responsibility for the flagship fund, the Platinum International Fund and other global equity funds and mandates.
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Andrew joined Platinum as a founding member in 1994 in the capacity of director and Deputy Chief Investment Officer. Previously he was a Vice President of Bankers Trust Australia covering Asian equities and managing the BT Select Market Trust -...
Expertise
Andrew joined Platinum as a founding member in 1994 in the capacity of director and Deputy Chief Investment Officer. Previously he was a Vice President of Bankers Trust Australia covering Asian equities and managing the BT Select Market Trust -...
Expertise
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