It is important to recognise key themes that may stimulate investment ideas, as we enter 2024. These important areas include gender diversity, the influence of technology on industries, and staying resilient in a sustainability-focused landscape at the top of the list. While these topics may inspire immediate investment ideas, we also consider where the potential and opportunities lie and how best to grab them in the new year while adopting a long-term perspective.
Changing culture when it comes to gender is often tricky, and there remains more to do to get more women into finance, encourage them to invest, and improve education about diversity. Women still face different life experiences and perspectives, and for investing, that translates into different needs, investment horizons and habits. We know that including more female investors benefits business and impacts the economy and financial markets overall, and diversity leads to more robust decision-making processes, reducing the potential for groupthink and potentially boosting returns and lowering earnings risks. Overcoming unconscious biases can further our common understanding of financial markets and make asset managers more successful, and investors can play a key role in this by encouraging female empowerment at every level, so everyone feels safe to express dissenting views respectfully, opening the way to new solutions.
Moving towards a carbon-neutral and ecologically sustainable circular economy is not only natural, it can also be profitable. Policymakers are increasingly recognising the wisdom of using market mechanisms to decouple economic growth from resource consumption, and there are promising opportunities across sectors like fast fashion, mobility and construction regarding circular economies, with regulations compelling companies to design products that are more durable, easily repairable and longer lasting. Firms that embrace sustainability in their supply chains could potentially attract eco-conscious consumers, resulting in increased brand loyalty and market share, improving sustainability while contributing to their bottom line.
In many areas, artificial intelligence (AI) is already accelerating scientific discovery and innovation, and recent advances in AI can be extremely useful for augmenting, rather than replacing, human expertise. Generative AI promises boosts in productivity, and its use is becoming clear in areas such as programming and summarising existing human knowledge, for say, a specific client question in business consulting. Large language models are also offering a more natural user interface with specialised applications, and we see a priority in identifying the long-term beneficiaries of AI and other types of disruptive technologies that have powerful levers to drive future revenue and profit growth. In our analysis, we put particular emphasis on the durable competitive advantage around a company’s AI product and its related growth potential.
The distinction between sustaining versus disruptive technologies should make investors cautious as to their ability to predict and pick potential winners. Current plans for utilising renewable energy as the most cost-effective solution to reduce greenhouse-gas emissions are set to shake up many established business models. The basic issues involved, including electricity storage and the potential of electric vehicles, have been recognised for decades, but the strength of utilities lies in sustaining technologies. Typically, this means catering to the needs of established, high-margin customers, with focus on incremental improvements to enhance existing products or services, rather than new niches. Among utilities, this typically means adding capacity, which hinders innovations that would disrupt their traditional business models. By contrast, disruptive technologies tend to be initially inferior for mainstream uses.
One such technology, cryptocurrencies, could be a valuable portfolio addition in an uncertain, rather than just a risky, world. Until they mature further, and as long as prices remain very volatile, the use of cryptocurrencies within a traditional portfolio for risk diversification is likely to be mainly of interest to sophisticated, institutional investors. However, as an alternative source of diversification for private, retail clients, the potential of cryptocurrencies could lie more towards having an additional type of affordable optionality against uncertainties, which may only become apparent with the benefit of hindsight.
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One country that should see a continued digitalisation drive and faster, higher productivity growth in various sectors is India, which has structural strengths in its demography and democracy, and business-friendly politics with a thriving service sector. The bond market is also opening up further, and the country is seeking more foreign direct investment. India’s advantages are best shown in contrast to China. Its workforce is expected to keep growing and peak in 2040, while China’s peaked in 2015. India’s big companies have received less public support and have been exposed to more competition. The country’s catch-up potential is substantial (India’s income per capita is US$2,500 or $3,300, versus China’s US$12,700 or $16,800), and it is profiting from the growing dispute between China and the West. India’s fundamental strengths and international interest should see flows into India increasing in 2024.
With its diverse strengths, wider Asia remains a global growth driver. The Regional Comprehensive Economic Partnership trade agreement among Asia Pacific nations which, even without India’s participation, involves 2.2 billion people and 30% of global trade, could contribute to this growth in trade within the Asia Pacific region in the future. Rising domestic consumption is also a growth driver there, and after years of sharply rising incomes, Asia’s emerging countries have developed a broad middle class with strong consumer spending power.
After a historically long dry spell, 2024 is looking to become a good year for bonds. Government bonds are yielding almost 5% in the US, almost 3% in Germany and almost 1% in Japan. Investing in government bonds from other countries or companies even offers an interest premium to that. It is no wonder that so many people are saying that bonds are back, but with the Fed announcing a “higher for longer” regime, growth and the labour market all proved more robust than expected, meaning some government bonds are likely to suffer their third negative year in a row. Central banks, unlikely to turn to further bond-punishing interest-rate hikes, are instead, from mid-2024, likely to cut interest rates, thus bond-price gains could be on the cards. While a resurgence of inflation does remain a risk, the high carry provides some security cushion, especially for corporate bonds, which we expect not to come under any pressure from a serious recession. With several elections in emerging markets adding to risk that is already heightened, we remain highly selective in this area.
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As real-estate prices now largely reflect higher interest rates, there may be scope for upside when yields fall. Higher yields have proven to be a formidable headwind for both residential and commercial properties, but fundamentals have generally been stalwart with tight vacancies and rising rents in many major markets and segments. E-commerce, coupled with efforts to bolster supply chains, is driving demand for warehouses. The office sector was shaken by work-from-home arrangements across the globe, but in Asian office markets, particularly South Korea and Japan, a cultural affinity for office-based interaction has limited the damage from remote working.
In theory, quality investing makes a lot of sense in an uncertain world, and having the support of long-term-thinking and patient investors, who understand the need to prepare for the next wave and see the potential of new opportunities early on, helps. Resilience means risk-preparedness, operationally and financially as well as via diversification. Just as a good defence enables a good and effective offence, resilience is a precondition for adaptability, and adaptability includes undertaking investments even in uncertain times, creating financial flexibility independent of the macroeconomic circumstances that may unfold in 2024.
Björn Jesch is global chief investment officer at DWS
