As 2023 draws to a close, Liontrust’s seven investment teams reflect on the past 12 months and give their views on expectations for the year ahead.
Peter Michaelis, Liontrust Sustainable Investment Team:
The foundations of our Sustainable themes have strengthened significantly. In the US, the Inflation Reduction Act (IRA) is allocating more than $370 billion for clean technology, energy efficiency, renewables and grid infrastructure upgrades. This will accelerate what were already strong themes around resource efficiency. In Europe, the Fit for 55 targets 55% renewable energy by 2030, and China has bold ambitions on electric vehicles and clean energy (50% electric vehicles by 2030 from 21% today and 33% renewable electricity by 2025).
In healthcare, the advances in gene sequencing continue to deliver breakthroughs in our ability to diagnose, prevent and treat diseases. And in cyber security, there is no let-up in demand for protection from increasingly sophisticated bad actors; for instance, ransomware attacks were up 37% last year. If we look at the valuations we are paying to access this strong growth, it is at low levels we have not seen for many years. The Liontrust SF UK Fund, for example, is trading at a 10-year low valuation versus its own history.
The prospects for fixed income portfolios are also attractive. As the base rate hikes start to manifest themselves into the real economy, this will reduce aggregate demand further, limiting the need for further rate hikes and causing the growth outlook to remain challenged. Given longer term yields or longer dated bonds are more correlated to the growth outlook, this should, in turn, cause yields to fall and returns to turn positive.
Ewan Thompson, Liontrust Global Fundamental Team:
The general backdrop for the emerging markets asset class has been challenging in 2023 due to two key factors – the ongoing disappointment surrounding China’s economic recovery after the abrupt shift away from zero-Covid and the rapid increase in global interest rates in response to elevated inflation. While China performed poorly, however, several individual markets bucked this trend with strong returns, including Taiwan, South Korea, India, Brazil and Mexico.
With emerging market valuations remaining depressed at a 25% discount to developed markets and well below their own 10-year average, the asset class is well placed to benefit from returning capital flows as growth reaccelerates and interest rates fall.
James Dowey, Liontrust Global Innovation Team:
It has been a good year for investment returns in technology and innovative companies, which have been a bright spot in difficult markets overall.
In 2023, interest rates had a diminishing impact on technology company stocks and the technology recession bottomed. The rest of the market has begun to contend with the lagged effects of interest rate hikes, but technology companies were first in and first out. They shed hundreds of thousands of jobs, refocused on core activities and improved profitability. Meanwhile, artificial intelligence has emerged as the driver of a new technology and innovation cycle. While AI has been progressing for many years, major recent gains in computing performance mean it has now begun to diffuse across the economy.
The prospects for innovation have never been stronger, our companies are lean and focused and valuations are attractive.
Anthony Cross, Liontrust Economic Advantage Team:
Financial markets in 2023 have faced considerable geopolitical instability and macroeconomic uncertainty. Within the UK stock market, there has been a continued disconnect between the relative stronger performance of the larger FTSE 100 companies and the underperforming FTSE 250 and smaller companies. Consistent flows out of UK equity funds have created considerable selling pressure, particularly on smaller companies, with the result that valuations have been overly compressed and offer considerable upside when the right catalysts for a rebound emerge.
We believe 2024 may see such catalysts. In the US and Europe, there are signs that inflation is coming down and economic indicators are softening. This could mean that interest rates may have peaked. Providing there is not a hard economic landing and interest rates start to fall, the attractions of equities will increase.
Phil Milburn, Liontrust Global Fixed Income Team:
Central banks are sticking to their “higher for longer” approach to interest rates as they want to soften labour market conditions to cure the difficult last leg of the inflation problem.
It will take a while for this higher for longer mantra to change, although restrictive monetary policy is starting to show through in a wider array of economic data. We believe the natural consequence will be later but larger interest rate cuts and then a rapid move towards a more neutral policy stance.
A mild recession is our central forecast for 2024. Private sector balance sheets are entering the downturn from a position of aggregate strength so this should prevent the recession from being deep. Public sector balance sheets are more stretched, meaning there is less room for any countercyclical expansionary spending to offset any growth weakness. Instead, the burden will fall mainly on monetary policy. If the markets start to fear a deeper recession, this could create a great buying opportunity for us to move from being neutral in credit, both investment and high yield, to a strategic overweight position.
John Husselbee, Liontrust Multi-Asset Team:
While a recession is still possible in 2024, we believe that if it happens it will be a small ‘r’ recession. Consumers are still spending money and most people have a job. What happens to inflation remains pivotal, although it looks likely we are through the worst.
More volatility may lie ahead, but markets have calmed from the high levels of distress seen in recent years. Higher interest rates will cause difficulties for companies and consumers, but economies go in cycles and we are due a recovery. AI will bring greater efficiencies and productivity and green shoots should emerge in the economy.
James Inglis-Jones, Liontrust Cashflow Solution Team:
European markets have the potential to perform quite well in 2024. Valuation support is beginning to look reasonably attractive on our measure of company cash flows and there are no signs of the kind of inappropriate levels of corporate investment that would make us concerned about the market outlook. The technical picture is somewhat uncertain, but, taken together with an attractive valuation level, this combination in the past has resulted in, on average, good performance from equity markets and there is no reason why it would be any different this time.
Bond markets have exercised unusual levels of influence over the equity market direction of late and this has tended to be good for equity markets, small caps and value stocks but less so for growth stocks.
The valuation of growth stocks, however, has become more reasonable and therefore we see some potential for growth stocks, supported by strong momentum, to perform well.
