By Pieter Fourie
The 2024 global equity market landscape presents a complex mix of challenges and opportunities for investors, with concentrated markets, elevated valuations, and ongoing economic uncertainty all highlighting the need for skilled active management.
Navigating this environment requires partnering with experienced active managers who can look beyond short-term market sentiment, identify high-quality businesses with attractive valuations and strong growth prospects, and construct well-diversified portfolios built for long-term resilience.
The 2023 US Product Development report reveals that most surveyed asset managers (73%) believe geopolitical shocks and recession (69%) will increase demand for active management in 2024. For this reason, I have unpacked how active managers can generate alpha through disciplined stock selection and a patient, long-term approach.
By partnering with skilled fund managers who can navigate uncertainty, maintain a long-term perspective, and identify attractive opportunities, investors can position their portfolios for success in 2024 and beyond. A disciplined investment approach, rigorous fundamental analysis, and active risk management have consistently delivered strong performance. That’s why we’re confident that active management will only continue to strengthen as we face the challenges and opportunities that lie ahead in global equity markets.
A global perspective on economic opportunities and challenges
The continued outperformance of the US stock market over the past decade. While regions like Europe and Japan have lagged, a handful of mega-cap companies have propelled the US market, resulting in concentrated returns and potentially inflated valuations. This presents a dilemma for investors – follow the benchmark and invest a significant portion of their global fund in these expensive US giants or seek undervalued opportunities elsewhere.
For the latter, active managers can unlock significant value by focusing on high-quality businesses with growth potential outside the mega-cap realm. He points to companies like General Dynamics, which has outperformed the US and global markets and delivered impressive returns while maintaining a reasonable valuation and exhibiting further growth potential.
Active managers have a good opportunity to generate alpha for clients by looking beyond the mega-cap stocks dominating the market. While these giants may struggle to grow sales, there is a wealth of high-quality companies with more compelling growth prospects trading at reasonable valuations. By identifying winners like Mastercard, Visa, Oracle, Alphabet, Yum! Brands, InterContinental Hotels Group, SAP, Samsung Electronics, and General Dynamics, we've delivered strong returns and finished in the top 15% of funds over the past decade. Simply hugging the benchmark and chasing mega-caps is likely to disappoint. The real potential lies in finding those gems that offer sustainable growth at attractive valuations.
Weathering economic storms for sustained portfolio performance
The past two years have presented significant market volatility, driven by factors such as the ongoing impact of the Covid-19 pandemic, geopolitical tensions, and shifting monetary policies. Active management has proven valuable, allowing investors to capitalise on market dislocations and generate alpha through careful stock selection.
Active managers who remained disciplined and focused on their investment philosophy were able to identify attractive opportunities during periods of market stress.
By leaning against the trend and investing in high-quality companies at reasonable valuations, these managers positioned their portfolios for solid performance in the subsequent market recovery. By carefully analysing company fundamentals and valuations, active managers could construct portfolios well-positioned to navigate potential market turbulence and deliver superior risk-adjusted returns over the long term.
Navigating a concentrated market
One of the key challenges facing investors in 2024 is the high level of market concentration. In 2023, a handful of mega-cap technology stocks dubbed the “magnificent seven” dominated the market and accounted for a disproportionate share of returns. This concentration poses risks for passive investors heavily exposed to these stocks, where negative developments could impact their portfolios. However, active managers benefit from the flexibility to diversify their holdings and seek opportunities beyond the more established names.
It is crucial that investors remain focused on business quality and valuations and how diversification will be essential in a very concentrated equity market. Active managers realise the benefits of looking beyond where a company is listed and focusing on its global operations when evaluating investment opportunities.
Investing in Western-listed businesses with significant exposure to emerging markets, such as the Intercontinental Hotels, Hilton Group, SAP, and Yum! Brands allows us to tap into their respective regional growth potential. The key is to identify high-quality companies with strong returns on capital, growing free cash flow, and smart asset allocation decisions. This global perspective allows active managers to find diversification and attractive growth opportunities that may be overlooked by those focusing solely on a company's listing location.
Partnering with a top-tier fund management team allows investors to benefit from a disciplined investment approach, rigorous fundamental analysis, and active risk management. These qualities and the ability to identify attractive opportunities and maintain a long-term perspective are essential for delivering superior returns in the years ahead.
As we look forward to Q2 and beyond in 2024, the case for active management in global equity markets has never been stronger. With valuations at elevated levels and the potential for continued market volatility, investors need the guidance and expertise of skilled fund managers who can navigate this challenging environment. By embracing this approach and partnering with the right team of skilled fund managers, investors can position themselves for success in 2024 and beyond.
* Fourie is the head of global equities at Sanlam Investments UK.
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