Markets have become increasingly fast moving and unpredictable, with investor sentiment increasingly being influenced by short-term noise. However, there are innovative themes and investment territories that investors with an eye to the future should consider, says Fidelity International.
“In this fast-changing world with cycles speeding up and becoming shorter, we believe that investors should remain dynamic and take a scenario-based approach,” says Henk-Jan Rikkerink, global head of solutions and multi-asset at Fidelity International.
For instance, Fidelity’s scenario probabilities for the end of 2024 are 40% for a soft landing, 30% for no landing, 25% for a cyclical recession and 5% for a balance sheet recession.
“We think a no landing outcome is significantly more likely than is implied in current market pricing, which places significant weight on a soft landing, particularly evident in risky assets,” adds Rikkerink in a May 14 note. “This means that the markets are still disregarding the potential for interest rate hikes if the no landing scenario continues to develop.”
Private assets have been garnering a lot of buzz from investors, and rightfully so, he says. “For investors comfortable with lower liquidity, adding private assets could improve portfolio returns and provide additional diversification.”
Private equity had a drop in dealmaking in 2023, but Rikkerink expects private equity funds with strong value creation strategies to do well going forward. “In addition, direct lending remains attractive, especially in the middle market.”
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Beyond large-cap tech
Several consensus trades have crowded the market over the past year, but Rikkerink says the winners of today might not be the leaders of tomorrow. “We expect markets to broaden beyond large-cap tech, where extraordinary earnings are rolling over and positioning is becoming extended.”
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The US and Japan remain attractive markets, he adds, given the resilient growth in the US and positive earnings revisions as well as encouraging policies that aim to improve better corporate governance in Japan.
Asia is “cyclically in a better place”, says Rikkerink, with exports picking up and China stabilising. “Additionally, valuations are attractive when compared to many developed markets, and we see attractive opportunities in Korea, India, Asean and Japan.”
The Asia pre-IPO market could also be a very interesting space in the years ahead as a source of attractive returns, he adds. “Asia is home to many high-quality growth companies, many of whom are choosing to stay private for longer. With a strong backlog and attractive valuations, the Asia IPO opportunity is a bright spot to look out for.”
Investing in AI
While the concept of AI has existed for decades, generative AI is a more recent development that is characterised by three aspects: easy-to-use, multi-purpose and unprecedentedly rapid adoption, says Wang Taosha, portfolio manager at Fidelity International.
“Unlike many internet companies in the 1990s, many leaders in generative AI today are very well-funded and are often backed by the deep pockets of major tech companies,” adds Wang in the same May 14 note.
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AI is a structural growth theme that should not be ignored, says Wang. “One way to consider it is taking a ‘stacked’ approach’. At the bottom layers are hardware and infrastructure. These include both the semiconductor elements — like GPUs and memory chips — as well as physical infrastructure such as data centres and electricity equipment.
As AI models get bigger and more powerful, they also become more complicated and energy-intensive to run. According to Wang, this will lead to a structurally greater demand for semiconductor content, particularly those designed with AI in mind.
Smarter and more extensive physical world infrastructure like smart grids and power equipment will also be required, especially against the backdrop of ageing infrastructure in many parts of the developed world, says Wang.
The middle layers of the AI stack are cloud computing and foundational models, says Wang. “There are already winners in these lines of business and these are often Big Tech names. They will continue to see structural growth and will need to make heavy capital expenditures in order to satisfy growing demand.”
Finally, the top layer of the AI stack are the various applications that incorporate AI for different commercial use cases in various sectors. The companies that incorporate this new tech productively and profitably stand to win, whereas those who fail to adapt may encounter challenges, says Wang.
“The fact is, AI is here to stay and some old business models may become obsolete while new ways of satisfying customer demand commercially will arise. Ultimately, AI-related investments will need to be justified by commercial profit from the commercial application of the technology and development in this layer is crucial to watch,” says Wang.
Photos: Fidelity International
