An age of agility: investment themes and opportunities in 2024 and beyond  

Heightened geopolitical risk, inflation volatility, and transition risks all point to greater volatility, dispersion and dislocation, conditions that are ripe for dynamic alpha generators, such as hedge funds, and strategies that can step into spaces that traditional lenders have left, such as private debt. Coupled with higher rates, hedge funds look poised for stronger returns this decade, welcome news to an industry that struggled to compete in the one-directional, liquidity-fueled equity markets of the last decade.

Sharply weakening sentiment related to China has contrasted starkly with US market strength in recent periods. We continue to recommend investors’ base allocations to China and EM are at benchmark weights at least, and indeed the negative sentiment may present a contrarian opportunity, to the extent that risks are priced in (at the time of writing).

While rates may have peaked, they seem unlikely to revert all the way back to the very low rates of the 2010s. This shift means the value of fixed income in multi-asset portfolio construction is clearly greater today. Investors with infrequent, periodic strategic asset allocation reviews would be wise to accelerate the next review. It would not be so wise, however, to assume that the defensive role of fixed income will be as strong as in the last decade – there is no guarantee we will automatically return to a period of negative correlations between equity and bonds. 

While interest rate increases are having an impact and cyclical inflationary pressures are subsiding, many significant structural inflationary pressures remain. Increasing protectionism, supply chain pressure, and the needs of the long-term energy transition all skew inflation risks to the upside. Furthermore, the co-ordination of fiscal and monetary efforts at the time of the pandemic could now devolve into a tension between a more restrictive monetary stance and continued accommodative fiscal support from governments eager to fund transition and/or win votes. 

The greatest deflationary force, on the services side of the equation, is likely to be AI. 2023 was arguably the year AI came of age, with those stocks deemed as AI enablers completely dominating global equity market returns.  The dynamic between these two opposing forces could result in a pattern for inflation that is near or at target for reasonable lengths of time, only to be punctuated with shocks that filter through to slightly higher long term average levels.

Higher rates today are once again highlighting the fragility of heavily indebted players in the market. It has shifted power from borrowers to lenders – in our view private debt is very attractive in this environment, providing liquidity to an economy in need of it, and offering investors strong risk-adjusted returns.

The disruption in energy supply clearly highlighted the need for energy security, not just of short-term oil and gas supplies, but also homegrown renewable energy for the long term.  Innovation will be key to delivering on the next wave of the transition – the hard-to-abate sectors: heavy industry – steel, cement, chemicals; and heavy transport – trucking, shipping, aviation.

The role of critical minerals, essential components of the transport and infrastructure build needed for the great electrification to occur, is more widely recognized today, and a feature in recent protectionist policies. At the time of writing, however, market pricing does not fully account for the anticipated demand. Active management is essential, as step changes in innovation and regulation will impact demand structures over time.