Questions answered
- What are your current market views for 2024?
- Is this the new “2023 recession”?
- How do you view market growth, value and duration?
- How has compounding played out in investment and when does valuation matter?
- Will dispersion pick up in 2024?
- Why do you actively avoid a few sectors when investing in duration companies?
- Is there a long-term secular story around low carbon transition related industries?
In this article, Alister Hibbert, Head of BlackRock's Strategic Equity Team and Portfolio Manager of Global Unconstrained Equity Strategy discusses the outlook for global equity in 2024, opportunities in duration companies and compounding, and potential growth pockets.
1. 2023 was historic on a number of levels but especially performance (with the exception of China). Can you quickly recap what your view was going into 2023 and current views for 2024?
In October 2022, we were cautious toward the market, cyclicals, and technology. By November 2022, we were confident that the one one-sided consensus of a recession was misguided, which was controversial at the time because the market consensus was still bearish. November 22 marked a definitive turning point to be long the market, cyclicals, and technology. This reflected our conviction that we were likely to see continued disinflation and supported our bullish outlook for developed market (DM) equities in 2023.
For 2024, we prefer growth over value. We believe the difference between value and growth comes down to the different fundamentals between 3 sectors:
- Tech (growth is very tech-heavy): We are bullish on software companies, semiconductors, and digital marketing companies.
- Financials and Energy (both tend to be more value-heavy): Financials do not look appealing in our opinion. Typically, when rates start falling, net interest margins start to contract, which isn't that appealing for future return potential. We believe energy is less attractive as well as the Organization of the Petroleum Exporting Countries (OPEC) faces large risk of over supply within oil markets.
On a longer time horizon, we see the opportunity to accumulate wealth by leaving capital in select, high quality, public active equities and letting it compound overtime.
2. This time last year (January 2023), US recession seemed a forgone conclusion and proved to be incorrect. This year, the consensus group think appears to be around the US Federal Reserve System (Fed) cutting rates and the related reactive function of equities doing well… With multiple rate cuts priced into the market, is this the new “2023 recession” forecast?
We believe that rates will be cut this year, but cuts are just noise and are irrelevant whether there will be 5 or 7 instances of beyond a 3-month horizon in our opinion. Instead, we believe it is more important to pay more attention to changes in the economy as that is what drives revenues / earnings and thus could influence portfolio changes.
Thinking about bull vs bear markets:
- In a bull market, corporate profits are generally flat at worst, rising to some extent and even beginning to reaccelerate. This was the environment for 2023.
- In a bear market corporate profits are generally falling on absolute terms, creating a hostile environment for equities. We don’t believe we’re in that environment right now.
2023 saw a deeply inverted yield curve and tripped everyone up because economists and strategists across the street were guided by history, finding similar periods to today, and then deciding what could happen. But this method results in nothing more than an educated guess.
Our process involves speaking with companies to formulate views. Take wage growth for example, it is important because it helps drive policymakers' decisions. People usually look at macroeconomic data for that information, but we leverage our data scientists to dig a bit deeper. For example, they will look at starting salaries and its changes on company websites, or even ask companies directly. We find this more informative of what is actually happening in markets.
Thinking ahead to 2024, no area of economy stands out to us as particularly worrying, and it does not seem evident that a recession will happen. Credit quality looks to be in good shape, cyclical sectors like housing and autos are fine in our opinion. The current environment is not fabulous economically and nominal growth (which is revenue for companies) is starting to slow down but, with rate cuts ahead of us we believe markets will look much better. From an economic momentum perspective, we believe the manufacturing downturn is likely coming to an end as we are at / near the end of inventory destocking.
3. How do you think about the different segments in the market between growth, value, and duration?
We see Value as ideas that focus on medium-term investment cases (2-3 years); Growth as companies which are likely to go into “beat and raise” cycles (like semiconductors, for example); and Duration as companies with long-term investment cases (10+ years) that are expected to have sustainable, high returns. When choosing duration companies, we look for ones that are “under-valued” and high quality.
We believe the best opportunity lies in public market equities and, more specifically, investing in duration companies over the long run, which we believe to be largely undervalued with strong compounding potential.
4. Can you give some examples of how compounding has played out in your investing career? When does valuation matter for you?
To us, valuation matters for investing in duration companies. However, because these assets are so undervalued, we are not as troubled on a day-to-day basis by what multiples they trade at. In our opinion markets are inefficient at valuing duration businesses and differentiating between companies that can sustain returns and compound over a long period of time vs those that cannot achieve that.
5. We saw a deeply concentrated rally in 2023. Views on dispersion picking up?
Dispersion will remain fairly normal, in our view. Dispersion is usually most extreme when the market experiences serious economic dislocations. However, looking at markets right now it seems unlikely to be the case.
6. When investing in duration companies, you actively avoid a few sectors –namely: energy, materials, utilities, and real estate. Wondering if you can give some thoughts around as to why that is the case?
It's important to think about where in the market you can derive confidence about a 10-year outlook. We think it is unlikely to have a 10-year view on returns in the oil industry and materials for example. Utilities face the challenge of government influence and regulation, while real estate can be attractive but is unlikely to generate the same kind of value that some tech companies can.
The idea that equity markets are efficient and that we should benchmark them is all wrong in our opinion. We need to focus our capital into a better representation of investors' optimal opportunity set.
7. Looking out 5-10 years, given the capex and stimulus required for the low carbon transition, is there a secular story for those related industries?
Megaforces are powerful and have potential for significant growth. The value creation opportunity for an individual company is a combination of the high returns they can generate and how much they can reinvest those high returns. Typically, we will look for companies that grow faster than nominal GDP.
It is important to look across the entire opportunity set and figure out where attractive return potential lies. For example, semiconductor industry is well positioned to benefit from the energy transition. Here, you may get a combination of high returns, high quality companies, but also opportunity to reinvest and outgrow nominal GDP.
