The macro trends we’ve observed following the pandemic signal that the era of synchronised global growth is over. A new regime has emerged in which growth cycles vary significantly and unpredictably worldwide.
Parts of the global economy that were once expected to drive global growth, such as China, have stalled. At the same time, markets that seemed on the verge of recession, like the US, have proved surprisingly resilient. Some regions remain in the doldrums.
For equity investors who are selective and active, such disparity and potential mispricing create opportunities.
The signals coming from various parts of the world are notably diverse. In the US, resilient consumers, a tight labour market and moderating inflation have bolstered macro conditions despite expectations of a slowdown as the lagged effects of restrictive monetary policy take hold.
In China, projections of an economic rebound originally earmarked for early 2023 keep getting pushed further out as investors contend with ongoing weakness in the property sector.
Meanwhile, the economic outlook in Europe appears incrementally weaker, with the Eurozone manufacturing purchasing managers’ index (PMI) declining since June 2021.
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Rising geopolitical tensions may further exacerbate these regional disparities. Roughly half the global population will head to the election polls in 2024, raising the odds for disruptive leadership shifts. At the same time, Europe and the Middle East find themselves in what could be drawn-out proxy wars.
Beneath these dynamics lie further differences between sectors and industries, largely driven by significant variations in the pace and progress of post-Covid-19 normalisation across end markets.
Among other challenges is the need to unload inventory amid swollen backlogs, which started with the semiconductor industry and has since rolled into consumer goods, medical equipment, transportation and logistics. Inventory-to-sales ratios have decreased significantly in some industries, indicating the resolution of these issues.
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However, the de-stocking phase has yet to begin for others, such as automation and general industrial companies, including electricals, machinery and miscellaneous durables. Many of these businesses faced production delays due to inadequate supplies of inputs like semiconductor chips.
As 2024 unfolds, we expect to see further de-stocking in some industries underlying wholesale trade, which could lead to lower-than-usual orders and sales, while the general availability of inventory could also pressure prices and margins. However, resolving supply chain issues could be a mixed blessing for companies that benefited from strong pricing when Covid-induced supply chain issues were triggering shortages.
At the same time, higher interest rates are intensifying the divergence in global trends. Certain industries feel the impact of higher borrowing costs more than others. These include industries behind big-ticket items like housing and autos and inventory-heavy industries such as distributors. Those whose operations rely less on leverage will experience less of an impact.
Macroeconomic trends indicate global disparities mirrored at the company level. For example, a leading provider of rolling bearings and related technologies to original equipment manufacturers (OEMs) and industrial operations observed differing levels of market strength across regions and industries.
The upside of volatility
We have highlighted just a few examples of market dynamics that affect the performance of certain sectors.
Ultimately, the combined effect of various forces throughout 2024 could yield a stark disparity between winners and losers, which means it’s more important than ever for stock pickers to stay active and highly selective.
Returns are no longer likely to be correlated across regions and industries, which provides a more favourable backdrop for passive investing. Desynchronised growth, as we are seeing now, should favour active investing.
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The increased volatility arising from this market and the economic and geopolitical environment presents even more opportunities for active managers to find high-quality yet underappreciated stocks that can also benefit from cycle-agnostic, longer-term secular themes.
A significant longer-term trend expected in the upcoming years is increased capital expenditure (capex) associated with near-shoring, driven partly by the realignment of global supply chains due to Covid-19. This shift urges companies to relocate operations closer to home and end consumers, leading to a notable rise in manufacturing spending in the US since the onset of the pandemic.
Near-shoring benefits US-focused manufacturers, banks and consumer product companies in countries such as India and Mexico, which benefit from the supply chain shifts. Factory automation is another area for investors to watch. Opportunities from this trend are vast and already on many companies’ radar, given the difficulties and higher cost of hiring labour. US industrial equipment and manufacturing plants, in particular, need significant automation upgrades following decades of underinvestment in manufacturing.
Moreover, near-shoring requires more automation to ensure product costs don’t rise due to higher labour costs. Direct beneficiaries of this trend include IoT (Internet of Things) and machine-vision technology providers, which are enabling more automation and plant efficiency, along with industrial automation companies. Industrial software companies also gain from this increased emphasis on automation and productivity.
The momentum behind green energy and net-zero spending also boost companies that help clients meet carbon-reduction goals. An estimated US$30 trillion ($39 trillion) needs to be spent over the next 15 years to reach net zero by 2050. Segments to benefit from this trend include heating and air conditioning product manufacturers, mining and rail equipment and electric vehicle batteries.
One of our recent additions to the portfolio is a multinational industrial engineering group specialising in steam-based products crucial for manufacturing plants. Industrial heat accounts for about 20% of global CO2 emissions, with 30% now being supplied by fuel-fired steam boilers that the company’s clients use to achieve net zero targets.
Capitalising on volatility and change
Though we may see the end of synchronised global growth, the resulting volatility creates an investment landscape ripe with alpha opportunities.
The key is combining on-the-ground insights into local industries with strong fundamental analysis, supported by a finely tuned and forward-looking process to identify and isolate the mispricings that arise as companies evolve.
Not all companies will be well-positioned to benefit from overarching secular themes in a transforming world. At PineBridge, by staying focused on stock selection as our only alpha source, we can more accurately evaluate a company and determine the likelihood of a stock outperforming the market’s expectations — both within the current cycle and relative to longer-term, cycle-agnostic trends.
The writers are all with PineBridge Investments. Rob Hinchliffe is a portfolio manager and head of global sector cluster research; Kenneth Ruskin is director of research and head of sustainable investing – global equities; and Michael Mark is a research analyst
