In the wake of the Magnificent 7’s continued triumph and the swift ascent of AI, 2023 emerged as the reign of growth stocks. Building on these trends, investors are now turning their sights to opportunities that remain largely untapped as we head into 2024. From emerging markets to infrastructure, five investors share the top undervalued sectors they are looking for in the New Year.
Mark Baribeau, portfolio manager of the PGIM Jennison Global Equity Opportunities Fund
AI and cloud computing continue to revolutionise industries, amplifying demand for increasingly intelligent software and infrastructure. We are optimistic about productivity-enhancing business applications that will be launched in the next 12 to 24 months. The best way to participate in the AI boom now is through the infrastructure layer where computer power is generated.
Elsewhere, as large, younger demographic populations with healthy disposable incomes are reshaping consumption patterns and generating persistent demand for luxury goods, we continue to favour strong, global consumer brands that have direct-to-consumer business models. These companies control customer engagement and inventory and are less susceptible to poor inventory practices and price markdowns. While not immune, the combination of resilient demand and strong price controls helps insulate the industry against broader economic headwinds.
Peter Bates, portfolio manager of the T. Rowe Price Global Select Equity Fund
Equities are still the best place to be for the long term, but the playbook that worked for the last 10 years will not work for the next decade. In a more uncertain environment, valuations will become even more important. A sensible investing approach to generating excess returns in the new regime is to balance growth and value style factor tilts, invest in durable growth themes, balance recession and macro risk, and find companies with a positive catalyst for change. In an uncertain world, areas of investment opportunity include AI, within the semiconductor ecosystem and AI infrastructure, healthcare innovation, such as obesity drugs and bioprocessing, and residential and commercial construction.
Pierre-Henri Cloarec, portfolio manager of Nordea’s Emerging Stars Equity strategy
India has the world’s second-largest population of financial consumers and abysmally low penetration of financial products. We expect Indian banks to benefit from the beginning of a new credit growth cycle, led by a young population with a desire to consume, combined with an under-leveraged household. We also expect a pick-up in private capex. Indian banks are well positioned to meet upcoming demand, with capital ratios well above regulatory requirements. Bank balance sheets are also generally in good shape, and according to the financial stability report of the Indian central bank (RBI), the loan default rate of Indian banks has fallen to a historically low level.
The Brazilian equity market is currently supported by improving GDP growth expectations, with the labour market and consumption remaining resilient as inflation decelerates. The first three 50bps rate cuts in August, September and November sent further positive signals to investors. The Brazilian consumer sector should benefit from the rate cuts, which are likely to ease the pent-up demand and continue to push private consumption. Significantly reduced pressure on consumer prices, the improved employment situation, and visibly increased wages are strengthening overall purchasing power. As a result, Brazilian consumer confidence is much higher than in Europe or other emerging markets.
Paul Middleton, co-manager of the Mirabaud Global Equity Focus and Global Equity Income funds
We use themes to identify areas which are growing faster than the overall economy, for structural reasons. We then invest in global leaders in these spaces. Thematic performance in 2023 has been dominated by AI, Obesity Drugs, and US infrastructure spend. As we look to 2024, this has led to some other areas offering compelling structural growth, that are now trading at more attractive valuations than previously. One such area would be our Automation theme, where Robotics names have suffered over the last 18 months, after seeing massive growth coming out of Covid. The best indicator for these names is the Japanese machine tool orders index, which we believe is in the process of bottoming after eight quarters of moderation. This cyclical side is supported by structural trends, with companies moving to make sure their supply chains are less dependent on China going forward, as well as wider long-term trends towards factory automation. We are invested in global leaders in the space, which tend to be Japanese companies. Valuations in this area are also compelling now.
Neil Denman, Senior Portfolio Manager, Sarasin & Partners
It may seem odd, but equity markets do not like companies following the long-established model of doing business. Historically, markets rewarded successful companies that looked to continue expanding through capital expenditure. However, markets today are frequently concerned that the free cashflow being deployed will fail to deliver the level of return the company previously generated.
We do not agree. In fact, this market mindset has opened up a wonderful opportunity to buy attractively valued world-class companies with fantastic track records of delivering profitable growth.
A prime example of the recent flawed market mentality can be seen in Texas Instruments (TI). TI is currently adding to its entirely US-based semiconductor manufacturing capacity in Texas and Utah, spending $5bn per year through 2026 to support future growth. Its chipsets are likely to be in demand as we see increased utilisation through automation, connected equipment, and energy saving device management. Electric vehicles and a smarter electrical grid also use the chipsets TI produces.
TI currently offers a 3.4% dividend yield, which has grown by a compound rate of 13.8% over the past five years. We are extremely happy to collect this attractive dividend and wait for the longer-term thematic thesis to play out.