Sometimes it seems that the equity market can hold on to only one idea at a time. In 2023 that idea was artificial intelligence (AI), but 2024 could see the markets widen their interests.
Market returns in 2023 surprised even the most optimistic of expectations. The ‘Magnificent Seven’, the largest US-listed technology companies, rose 107% ($, total return) over the year.[1] In the process they added around $4.7 trillion to the value of the of the S&P 500 Index – equivalent to nearly twice the value of the entire FTSE100 index.
The spectacular returns from this handful of stocks was in part a comeback from their weakness in 2022. But it was largely thanks to excitement about the disruptive potential of generative artificial intelligence (AI).
Gen AI
Released on 30 November 2022, ChatGPT took just two months to clock up 100 million users, a milestone that even the runaway success TikTok took a full nine months to achieve.[2]
We too are excited about the potential for this disruptive technology to create new software applications, automate tasks and deliver productivity gains across the economy. So far, AI has accelerated demand for advanced semiconductors, such as graphics processing units (GPUs), and will accelerate the adoption of cloud computing. In time, it will allow software companies and the owners of unique data sets to charge more for their products.
However, looking back over the past two decades the scale of US technology’s gains in 2023 is rivalled only by the sector’s performance in 2009 and 2020. In both these earlier instances, tech performance over the following years was less remarkable and more in line with the overall market. Although it is too soon to suggest that the ‘Mag 7’ could become the ‘Lag 7’, healthy equity markets do require a broader and more diverse range of winners.
Fortunately, our multi-thematic approach provides strong clues as to where these non-AI winners might be found.
Demographic demands
According to the World Health Organization, the global population aged 60 years or older will double between 2015 and 2050.[3] This would see a decline in the working-age population and a rise in the number of people dependent on healthcare systems and savings. Such an extraordinary step-change in ageing would bring major changes in consumer behaviour and could also turbo-charge investment in automation.
Productivity gains are essential if economic growth is to be generated without growth in the workforce. This will drive accelerating demand for factory automation, machine vision, precision agriculture, supply chain technology and testing. Portfolio companies that we expect to benefit from these profound social changes include Siemens (smart infrastructure), Deere (agriculture), Keyence (machine vision), Thermo Fisher (laboratory supplies) and Prologis (logistics real estate).
An ageing population also places greater demand on healthcare systems. A new class of anti-obesity drugs from Eli Lilly, Novo Nordisk and Amgen could contribute to healthier populations with longer lifespans, while also reducing healthcare costs for individuals and governments.
However, we believe that the potential for anti-obesity drugs to disrupt the medical technology industry is probably over-stated, particularly when longer-term growth in the patient population is taken into account. We see attractive investment opportunities among medical devices companies such as Smith & Nephew and Medtronic. These, we believe, have been unfairly marked down by the markets during the recent craze for anti-obesity drugs and currently offer considerable value.
A changing climate
The National Oceanic and Atmospheric Administration and multiple other sources, expect 2023 to have been the hottest year on record.[4] This is the result of El Niño conditions and human-caused climate change. At the COP28 conference held in Dubai in December, countries agreed to push towards tripling renewable energy capacity, doubling the rate of energy efficiency improvement by 2030, and tripling nuclear capacity by 2050. This will require enormous private sector funding and deeper supply chains, while fuelling demand for key commodities and stimulating the development of new technologies.
We see great long-term opportunities in companies that can assist in the transition to lower-carbon economies and adjusting to climate change. These include Dassault Systèmes (software) and Tetra Tech (consultancy), select commodity stocks such as Lynas Rare Earths, Air Liquide (hydrogen technology) and Daikin, a specialist in heat pumps and air conditioning.
Ultimately, there is an urgent need to reduce real-world emissions in hard-to-abate sectors. To help make this a reality, we continue to engage with companies, pressing them to commit to more stringent science-based carbon-reduction targets and urging them to invest in climate adaptation and mitigation.
Broadening out
After 2023’s impressive market gains, we see scope for further upside across a wider range of equities, provided that inflation continues to fall and lower interest rates support higher valuations in the parts of the market that lagged last year.
This broadening out will benefit companies across our Ageing, Automation and Climate Change themes, as they take up the baton from Digitalisation, which led the way so magnificently in 2023.
[1] All data in this article sourced from Bloomberg/S&P, unless stated otherwise.
[2] Reuters, 2 February 2023
[3] World Health Organization, Ageing and health, 1 October 2022
[4] National Oceanic and Atmospheric Administration, December 2023
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