The economist and author tells our sister title Portfolio Adviser there is a “tug of war” debate as to whether rates will return to near-zero levels as inflation falls, then revert to a ‘new normal’ of 2% or lower; or whether the past two decades of ultra-low interest rates were an anomaly, and that they are set to return to a more normalised range of 3-5%.

Depending on which scenario comes to the fore, she says there will be significant ramifications on which asset classes will outperform, and which will struggle, over the medium-to-long term.

“Anything where the opportunity to generate returns is based on a low rate is going to suffer. So, anything that relies on leverage or on taking outsized bets – I believe venture capital falls into this space, for example,” she says. “This is why I don’t think the Targeted Absolute Return sector is winning right now, either.

“Of course, there is a debate as to whether we will return to a low rate environment, in which case these opportunities could become interesting again. But given what happened to markets in 2022, 2023 was a case of going back to basics and asking: ‘in a higher cost-of-capital environment, where will the genuine returns come from?’”

Over the last three full years, equity and corporate bond market returns have varied widely. In 2021, the MSCI All-Country World index achieved a total return of 19.6% while the Bloomberg Global Aggregate Corporate Bond index fell 2%. Then in 2022, global equities suffered with the MSCI ACWI falling by more than 8%, while global corporates also lost more than 6%. Both asset classes achieved positive returns last year at 15.3% and 5.5% respectively, according to data from FE Fundinfo.

These returns coincide with varying moves from developed market central banks in a bid to curb rising inflation. When central banks embarked on interest rate rises at the end of 2021, bonds suffered while economic uncertainty weighed on equities. Rate hikes continued throughout the course of 2023, with inflation beginning to fall by varying degrees across the US, the UK and Europe.

“In 2023 there was a lot of discussion about value investing returning to the fore,” Baroness Moyo says. “If we consider the businesses which can survive over the long term and generate real returns above the cost of capital, these types of businesses certainly do look interesting. Which is why what happened in 2023 was odd, because the performance of growth stocks such as the Magnificent Seven was an anomaly in terms of the mood music of markets, given the interest rate moves we had seen.

“In short, it has been too easy to make good returns in bog standard, traditional multi-asset portfolios. You didn’t have to go into long/short portfolios, or venture capital, or anything that required a lot of leverage to make returns. And in fact, it is those areas which have now become higher risk. So, for now, I would argue that it is still very difficult to make the case for people to allocate capital to absolute return strategies.”

See also: Morningstar: Are basic allocation strategies still relevant?

The economist says that, while investors started 2023 “excited about credit”, given interest rate expectations, they are now beginning to hold off and question longer-term themes, given continued economic uncertainty.

AI and decarbonisation

“I would argue that there are two huge key themes. One is AI; hence the Magnificent Seven breaking out of that value anomaly last year. The second one is decarbonisation,” Baroness Moyo – who is also co-principle at the Versaca Investments family office – says.

“The last time we had a catalytic move in the economy on a structural basis was the 1980s, when we saw tech investment opportunities. This is the next one.”

These two themes spell a “real fundamental shift” in how economies will work in the future and therefore which assets will perform well, the economist says, although she adds that the cost of capital “obviously matters” in terms of how people will play these markets.

In addition to historically higher rates, Baroness Moyo says geopolitics have become more volatile – at a time when markets are pricing in interest rate cuts.

“I don’t think anyone over the last year would have accounted for two wars, the announcement of 11 countries joining Brics, swing states – real issues that could now be re-inflationary,” she warns.

“US inflation still stands at 3.1%. Germany is in a recession and Europe is weak, which could signal that rate cuts could be on the docket.

“Geopolitics could be incredibly disruptive, and could mean we live a ‘higher for longer’ environment and that is set to continue.”

Finding dislocations

Alongside moving out of leveraged plays, this uncertain backdrop has also led Baroness Moyo to play equities more “opportunistically”, holding out for market dislocations in favoured sectors such as healthcare, or more attractively-valued companies set to benefit from AI.

“We are mostly looking at AI on a ‘wait-and-see’ basis for the reasons that I mentioned. But if we start to see real productivity gains and genuine possibility for disruption from AI, I think it will be an opportunity.

“What does this mean for us? It means a skew towards taking money out of equities and putting it into cash or bonds, and waiting for opportunities in these much more structured bets such as AI.

“If it is true that, over the next 20 to 30 years there will be a fundamental shift in how the world operates, we want to be a part of that. So, the best thing to do is to dip in and take some money out of markets where we could be losing and put it into bonds, which are earning us 5.5-6%, until there is more clarity around how best to play the AI space.”

That being said, Baroness Moyo has “taken a nibble” at some less widely-held stocks she believes are attractively valued such as US healthcare provider HCA and cloud-based software company Salesforce.

Not-so-magnificent Seven?

When it comes to the Magnificent Seven stocks – many of which have become synonymous with investing in AI such as Nvidia, Amazon and Alphabet – Baroness Moyo is less tempted and says valuations are “too rich”.

“I understand the whole euphoria; it’s the New Year, let’s all get excited. But the market has sold off a fair amount already, coming into the year.

“But when it comes to the Magnificent Seven, which are trading on high price-to-earnings multiples… We had a bad 2021, a mixed 2022 with a big skew to certain stocks. In 2023, my sense was that people were waiting and seeing. And now, I think people are waiting for that first rate cut, then they are going to bank as much of that return as possible.

“So if anything, I’m worried that markets are going to sell off. Not initially, but I think institutional investors could be waiting for a rate cut and a market rally, at which point they will bank their gains tactically.”

The other risk with the Magnificent Seven stocks, says Baroness Moyo, is that they account for a very significant proportion of the S&P 500. According to data from Yahoo Finance, this handful of companies accounts for 29% of the US index’s entire market cap.

“If I look at the Magnificent Seven versus the 493 remaining stocks in the index, and I had to take a bet on either a bigger rally among the Magnificent Seven, or a revenue catch-up from the 493 others, I am going to bet on the catch-up,” she reasons.

“Do I believe that tech is the future? Absolutely. But we are talking about a numbers game here. I am looking at multiples and margins, the ability to grow top-line revenue and the ability to cut costs.

“On that basis, I think it will be harder for those very efficient larger companies, which achieved enormous gains in 2023, to continue that growth. I think a lot of value has been squeezed out of the Magnificent Seven, and a lot of that value is now dependent on how they execute on AI.”

Value in energy

In contrast, Baroness Moyo says the energy sector offers attractive valuations. “Why? Because we’re consuming 100 million barrels of oil every day across 8 billion people. People need energy to live – whether that is from fossil fuels or from renewables. That is an area where I think there have been relatively bad returns, but there is real opportunity for upside.

“For me, value investing is about a compelling sector-based narrative that is based off of basic needs, such as food, energy and transportation. But these companies have to be well-run. You have to be able to look at the margins, the fundamental demand and what that might mean for long-term opportunities, in order to generate risk-adjusted returns above the cost of capital.”

For the economist, this could mean investing in companies which provide fossil fuels and are looking to embark on the transition to net zero, as well as those leading the charge on reducing our dependence on carbon.

See also: Canada Life’s Sriharan: The rules of engagement on asset allocation have changed

Zambia-born Moyo says: “When you have been raised in an environment – like I have – where electricity and water is not automatic, you have a very different understanding of how difficult it is to deliver energy and deliver water.

“In the west, there are a lot of people who have good intentions for us to move and transition into this new equilibrium, which is renewables-based. That’s fantastic. I don’t know anybody who is against that.

“However, we have to be sensible about what the costs of that journey are and how easy it is to execute. It’s 2024 and there are many countries around the world which cannot create energy on a sustainable basis. And I’m not just talking about desperately poor countries – this includes middle-income countries like South Africa. Even California has suffered from energy disruption.

“This, to me, is precisely the dislocation that presents investment opportunities. The vast scale of our energy requirements, the need to transition, and the requirement to find the best companies at actually providing this.”

Has Japan turned a corner?

On a regional, macroeconomic basis, Baroness Moyo is positive on the US and Japan. When asked whether Japan has become a consensus trade, given its recent stockmarket rally, Baroness Moyo says there are two key reasons the market has performed so well. “One is technology and the other is energy – the two big long-term trends driving markets. These are massive pivot points for the world, and I think people see Japan as very much at the coalface of that.”

But people have been predicting a “new dawn” for Japan for decades – since its economy slumped throughout the nineties. Is the recent recovery the real deal? The economist does indeed believe the country has “turned a corner”.

“It’s extremely difficult to run an economy, to get a slow economy moving, and to get businesses and companies to work efficiently. There is a whole potential system of errors – a lot of things have to go right, and we have seen in the past how quickly things can fall apart. Germany was a huge economy doing well, and look how quickly it has come off the rails,” she explains.

“Japan has a lot of things going right for it. It has strong levels of high education, it has a business sector which is sharp and knows how to innovate. It is difficult for a country to put these things in place.

“We have seen it in the UK – I often talk about how, 15 years ago, business was a big piece of the story. Business accounted for a large part of the UK economy; everyone was talking about the banks, Rolls Royce, Marks & Spencer. Today, that is less the case.”

Home market

Indeed, while the Topix has gained 9.2% over the last six months alone, according to FE Fundinfo data, the FTSE 100 has achieved less than one quarter of these gains over the same time frame, at just 1.3%. It has also achieved less than half of the gains of the MSCI All-Country World index over the last five and 10 years. Does the UK market present a value opportunity?

“I’m afraid it will still be a case of ‘wait and see’ for the UK. There is a lot of hope that this is the home of industrial revolution; that we can get back to business and back to clarity. But the business and markets have become so intertwined with politics that there is risk,” Baroness Moyo says.

See also: Facing the inflation dilemma head on

“It is at the point with politics where business has not been able to work without a political overhang creating costs from a regulatory perspective, and from a risk mitigation attitude when it comes to investing.

“In the US, if I talk about AI or the energy transition, the first question people will ask me is how much money they could make if they invest $1 – what return would this generate? When I have the same conversation in Europe, the first question is how to mitigate any risks coming from those themes.

“Our only way out of this is to find some kind of balance between these two attitudes. I’m worried that a lot of conversation in the UK is still very top down and government led, where people would rather kill off investing in certain areas, rather than use innovation to solve any issues.”

Emerging markets

Baroness Moyo is also reticent to invest in emerging market equities, arguing there are other areas where investors can generate “considerable returns, above the cost of capital, without the inherent risk”.

“I understand the arguments on paper. The macroeconomic arguments are very compelling. But as a practical matter, life is too short,” she says. “It sounds flippant, but it’s fundamentally true. Investors only have a certain number of years to make returns. That doesn’t mean they can’t ultimately achieve gains and compound those returns. But why take the risk by putting your capital in a market with slowing growth geopolitical risks and FX problems? It’s very hard.

“In my case, I only have 20 years to compound any returns. Why would I waste my time trying to work my money in an uncertain environment? Yes there could be some outside bets but I am willing to leave that money on the table.”

See also: Top five investment themes to look out for in India in 2024

She cites India as an example which is popular among investors. According to FE Fundinfo, the MSCI India index has returned 26.3% over the last year – more than double that of the MSCI ACWI.

“Lots of people say they are going to make billions by investing in India. Good luck to you, but I am willing to reduce my basis-point returns and not have to deal with the risk,” she reasons.

“Would I ever say India is never going to make it? No, it’s not my place to say that. But what I will say is it is extremely difficult to generate predictable returns in that kind of environment. There is a lot of red tape; it is definitely skewed towards locals winning over the foreign partner. It doesn’t have a great track record.

“People have to understand it’s not free money; there are other places you can invest and generate returns with relatively little risk.”

This article was written for our sister title Portfolio Adviser

Fixed income strategies Aegon High Yield Bond and BlueBay Emerging Market Unconstrained Bond were among the funds to receive the rating, which recognises strategies the FundCalibre research team believes to be the best among their asset class peers.

FundCalibre research director Juliet Schooling Latter noted the £611m Aegon fund’s “excellent” track record in recent years, which has seen it placed among the top quartile of performers in the IA Sterling High Yield sector over one, three, and five years, according to FE Fundinfo data.

Elsewhere, Ashoka India Equity Investment Trust was also commended by Schooling Latter.

She said: “Launched in 2018, this trust invests in Indian companies of all sizes. The trust adopts a stock-picking approach to target scalable businesses with sustainable superior returns on capital. Aided by a huge bank of experienced research analysts, the trust has comfortably been the best performer in its sector since inception.

“We like the trust’s unique approach to stock selection and its ability to go deeper into both the mid and small-cap markets. A highly unconstrained vehicle, we also like its approach to ESG, specifically governance, which can be a critical issue in India.”

See also: Lindsell Train, Invesco and Schroders managers join 2024 FE Alpha Manager list

Fidelity Asian Smaller Companies fund manager Nitin Bajaj was commended by FundCalibre for his clear philosophy and wealth of experience investing in the region.

“This is a genuine stockpicking fund with an emphasis on buying good businesses at prices discounted by the market. The fund has a contrarian ‘value’ bias and high active share. Risk is considered in absolute terms rather than relative to any benchmark or peer group,” Schooling Latter noted.

Comgest Growth America was commended for its “clear process” and “experienced management team”. The $990m strategy has achieved top quartile returns in the IA North America sector over one, three and five years.

Meanwhile, the £257m Martin Currie Global Portfolio Trust was also highlighted for its long term performance.

“The trust’s manager, Zehrid Osmani, has proven himself to be an excellent manager of high conviction strategies. The highly-driven research approach has proven to be extremely successful over the longer term across a range of portfolios and we see no reason why this cannot continue on this trust,” Schooling Latter said.

See also: Investors increasingly eyeing alternatives as volatility fears rise

Ninety One Diversified Income, which launched in 2012, is designed to either replace or complement bonds in a portfolio. The majority of the fund is held in fixed income assets, while it also incorporates strategic equity positions.

“We also like the team’s use of future options and swaps to hedge equity, duration and credit risk,” the FundCalibre research director added.

Four funds were also handed the ‘Elite Radar’ badge, which is awarded to strategies that are on the research team’s shortlist and could receive an Elite rating in the future.

The strategies receiving the rating were Artemis Leading Consumer Brands, GQG Partners US Equity, Man GLG Dynamic Income, and Redwheel Biodiversity.

This article was written for our sister title Portfolio Adviser

Both funds were given a ‘red’ rating for performance, meaning they will undergo changes in order to improve value to investors.

Of the 13 HL funds assessed, three strategies were given an amber rating which means they have delivered value to investors but require attention.

Those funds were the HL Multi-Manager High Income, HL Multi-Manager UK Growth, and HL Multi-Manager European.

The assessment of value (AoV) process has been mandated by the Financial Conduct Authority (FCA) since 2019, requiring firms to assess their product ranges on whether they have delivered value for money for investors.

Strategy overhauls

On the Asia & Emerging Markets fund, HL noted performance was “disappointing” due to “poor stock selection”, as it missed out on a rally favouring Taiwanese and Indian stocks over cheaper Chinese and Hong Kong-listed shares.

The fund was down 3.3% in 2023, compared to the average IA Specialist sector fund which rose 7.9%.

HL said that it had removed two managers on the fund in order to improve outcomes in the longer term. They have added Invesco Global Emerging Markets as part of those changes.

“We currently believe this fund is not delivering value to investors through performance. The upgrades to the investment processes and the changes detailed have been made to enhance future performance and we continue to review the fund proposition,” HL noted.

On the red-rated Strategic Bond strategy, HL added: “Over the last 12 months we have executed a near-total overhaul of our portfolio. This largely reflects the significantly more attractive yields on offer from bonds compared with a year earlier. It also reflects a desire to have more control over the fund’s allocations.

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“Previously, we delegated such decisions to managers of ‘strategic’ bond funds. Going forward, we will decide how much we wish to allocate to government bonds, investment grade corporate bonds, higher-yielding debt and bonds from emerging markets.

“We believe these changes will allow us to deliver the fund’s objectives and to improve long-term performance relative to the IA £ Strategic Bond peer group aided by high-calibre bond fund managers, including those running global funds and with a broad opportunity set.”

This article was written for our sister title Portfolio Adviser

Strong rates of economic growth can boost corporate profits and increase investor confidence. Likewise, an expanding economy often attracts foreign investment, further fuelling equity markets. This backdrop bodes well for the country heading into 2024 and beyond but here are five areas, in particular, we’ll be keeping our eye on.

Elections: Stability amid volatility

The 2024 Indian general elections are a pivotal event, with the Bharatiya Janata Party (BJP) led by Narendra Modi likely to retain power. The BJP led in the recent state elections of December 2023, further demonstrating the party’s popularity and likelihood of winning in general elections.

Such political continuity suggests sustained reforms and economic policies. The past decade under BJP’s governance has seen significant deleveraging and reforms. Despite likely heightened market volatility around the election period, we believe the long-term outlook remains positive, with a strong foundation set for continued growth and stability post-election.

Oil and energy prices: Navigating external shocks

India’s economic landscape continues to be influenced by global energy dynamics, especially in the aftermath of conflicts such as the Russia-Ukraine war and tensions in the Israel-Palestine region. As one of India’s largest imports, oil prices pose a significant risk.

However, the country’s robust foreign exchange reserves and potential financial inflows from its inclusion in the JP Morgan bond index could mitigate Current Account Deficit (CAD) pressures. This dynamic demands careful monitoring, as it directly impacts India’s macroeconomic stability.

PLI scheme and manufacturing: A new era

India’s manufacturing sector is poised for a transformative leap, with the production linked incentive (PLI) scheme attracting global giants such as Apple and Samsung. The potential entry of Tesla, driven by attractive domestic manufacturing incentives and access to India’s vast consumer market, marks a significant milestone. This shift not only diversifies India’s manufacturing base but also reduces tariff burdens, making it an attractive destination for international companies seeking to decentralise their manufacturing bases.

The AI challenge: Reshaping the IT landscape

The rapid advancement of artificial intelligence (AI) presents a formidable challenge to India’s traditional IT outsourcing model. The rise of Global Captive Centres signifies a shift towards in-house, more efficient operations by global corporations. This trend threatens the business models of many listed Indian IT service providers, demanding a strategic reorientation towards innovation and higher-value services to maintain competitiveness in the evolving digital landscape.

Indian consumption: A pillar of economic strength

The Indian economy’s backbone, consumption, is witnessing a significant upswing, particularly in the real estate sector. This resurgence has a substantial multiplier effect on the economy, signalling a robust increase in consumer demand. With consumer leverage still at modest levels, the trend towards increased spending is expected to bolster the consumption-driven sectors. Investors should closely watch this trend, as it offers insights into the broader health and direction of the Indian economy.

Conclusion

In our opinion, investing in India in 2024 requires a nuanced understanding of these five key themes. The political landscape, external economic shocks, manufacturing incentives, the technological revolution in AI, and the robust consumption patterns collectively shape the investment climate.

Navigating these themes with a balanced approach, focusing on long-term trends while being cognisant of short-term volatilities, will be crucial for investors looking to capitalise on India’s growth trajectory.

It is one which is shaping up to be strong as indicated by the government’s recent revision up of its GDP forecasts suggesting continued economic expansion in excess of 7% for the foreseeable future.

Andy Draycott & Abhinav Mehra are co-managers of Chikara Indian Subcontinent fund

In a commentary note, the fund rating firm’s client engagement manager Katie Sykes and MPS accounts manager Scott McNiven noted the conflicting signals in the global markets.

“2023 hasn’t quite been the disaster area expected when it comes to recession, but savings built up by households and businesses during the pandemic must be nearing depletion point by now,” they said.

“Government influence through spending and taxation is coming to an end and with the cost of living having skyrocketed over the last two years, refinancing needs are back with a vengeance in an environment of credit tightening.”

See also: What does 2024 hold in store for the wealth management industry?

The pair acknowledged the prevailing view is that interest rates have peaked as inflation is being brought under control, but the timing on rate cuts remains very uncertain.

The question of whether central banks will wait until damage from higher rates becomes ‘obvious’ or move early enough to avoid a recession is a crucial one.

“Europe is slowing down faster than the US and we’re already seeing signs of a recession,” they noted. “Will this direction of travel take hold, and will we see the same trend in the US in the coming months?”

“Wall Street seems convinced that a soft landing will be achieved, and a deep recession avoided, but economic growth will be slow as a result. No matter where you’re placing your bets, it’s all to play for in 2024 and the mood may shift at pace.”

Turning to equities, RSMR urged caution over the ‘Magnificent Seven’ US giants that dominated the stockmarket last year: Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla.

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“Coming into 2024, between them, they were worth more than the stock markets of the UK, Japan, France, China, and Canada combined,” they said.

“They now make up roughly 20% of the global stockmarket and last year their shares rose by around 70% on average, heavily contributing to stock market gains as a whole. If you had them in your portfolio last year, you were likely to be sitting pretty, but the outlook for 2024 may not be quite so marvellous.”

RSMR added that data from Refinitiv shows market shares of the Magnificent Seven fell by $316bn over the first two trading days of 2024.

“Given that they have many similar characteristics, one thing seems likely – if one falls, the domino effect will render them all much less magnificent,” they noted.

The firm pointed to emerging markets  as potential bright spot with companies expected to have higher earnings growth than the developed world in 2024.

“Divergencies exists of course and not all countries will profit to the same degree, but emerging markets equities should benefit from an improving growth premium and increasing exports, forging a brighter earnings outlook.”

China remains a concern, but there are some positive signs. “Investors have been concerned over slowing growth and high levels of debt and with investment in real estate in China floundering in recent years, there’s definite room for improvement,” the RSMR team said.

The firm also noted industries in China such as aviation, healthcare, renewable energy, and high-end manufacturing are showing ‘high growth potential’ and are open to foreign investment.

See also: Schroders launches multi-asset income fund

The AI theme is very much in play in China, with the direction of global AI governance and China’s role in the developing panorama being something to watch.

RSMR also said India has ‘gone from strength to strength’ in 2023 achieving 7-8% economic growth and prospects remain bright, supported by mainly domestic demand. By 2028, India’s economy is expected to be bigger than Germany and Japan, making it the third largest globally.