Philip Saunders – Director, Investment Institute at Ninety One | Iain Cunningham – Portfolio manager, Global Macro Allocation | Grant Webster – Co-Head of Emerging Market & Sovereign FX | Charlie Dutton – Portfolio Manager, Asia Pacific Franchise

• Tensions between superpowers could create risks for businesses which overlap those countries, such as US firms deriving significant revenues from China. On the other hand, competition between powers will drive investment in select areas, creating opportunities for investors.
• For example, Europe, the US, and China are all trying to become independent in the production of strategic technology, like semiconductors. Whether this is possible is debatable, but it will result in a significant rise in capital expenditure.
• Following an era of globalisation, we may see a renewed focus on ‘regionalisation’. Trading relationships are already changing, and contrary to perceptions that protectionism is rising, some trade barriers are actually being dismantled. Meanwhile, global supply chains remain highly enmeshed. Russia’s invasion of Ukraine demonstrated how interconnected the world is – Europe’s reliance on Russian gas being just one example.
• The ‘dedollarisation’ trend (when countries seek to reduce reliance on the US dollar as a reserve currency and a means of exchange) is persisting. Also, sovereign debt to GDP is at high levels, and many countries rely on external funding. However, this source of funds could dry up if investors fear the weaponisation of that debt, as happened to Russia.
• China faces challenges: youth unemployment, a stressed property sector and high local government debt, to name some of them. But it will continue growing via productivity gains. Capital is flowing from banking, real estate, and state-owned enterprises into digital, electric-vehicle supply chains and financial institutions. There are many opportunities for investors.
• In short, we are moving into a new market and economic regime. The cost of capital will rise, but counter-intuitively, so will investment and capital expenditure – deglobalisation, decarbonisation and defence spending are all more capital- and resource-intensive. For investors, sectors that have done well historically may not do as well going forward.

Ellie Clapton – Multi-Asset Portfolio Specialist | Ben Lambert – Portfolio Manager, European Equity | Jason Borbora-Sheen – Portfolio Manager, Global Multi-Asset Income | Tom Nelson – Portfolio Manager, Global Natural Resources

• Do not expect inflation to simply move higher and stay there. Historically, it has rarely settled, moving through the longer-term average in both directions. So, while we expect the base level of inflation to be higher, we think inflation is likely to be much more volatile than we have experienced since the 2008/9 Global Financial Crisis.
• Brace for more volatile commodity prices in particular, and the consequent inflationary impacts. A decade and more of underinvestment in exploration and asset development has left the commodity complex vulnerable to price spikes.
• In the short- to medium-term, the energy transition is likely to be inflationary, because building the infrastructure for a low-carbon global economy will be expensive. Ultimately, however, it may be disinflationary if energy becomes cheaper.
• Investors have a strong tendency to anchor on what has worked in the past. Yet at the very least, this is a good time to re-examine conventional wisdom and find potential ‘hedges’ for a market-regime change. Out-of-favour and under-owned parts of the market in particular should be re-assessed. And don’t forget low-correlation assets like gold.
• Broadly, there are opportunities – higher inflation does not necessarily mean weak growth and risk-asset returns. But be selective and look carefully at precisely what you are buying in both fixed income and equity markets. Within many markets, there are wide (and widening) differences between superficially similar assets.

Joseph Knight – Portfolio Specialist, Quality | Abrie Pretorious – Portfolio Manager, Global Quality Dividend Growth | Will Nott – Analyst, Quality

• While the market is fixated on AI, it’s important to cut out the noise and focus on the context. Humans have been automating work for nearly 300 years, as humans began to transition from creating goods by hand to using machines.
• We are clearly at an inflection point. Corporate investment in AI has nearly quadrupled to almost US$200bn per year since 2017. Investors typically overestimate technology in the short term, and underestimate tech in the long term. Valuations can therefore become disconnected from reality, as we saw most famously with the dotcom crash.
• We think that uncovering the ‘picks and shovels’ (companies providing the infrastructure to enable AI) is a smart approach for investors. Infrastructure companies are often enduring winners, as they are businesses that will benefit regardless of the ultimate destination.
• AI is helping to transfer healthcare, which typically contains inefficient business models. Increased computing power could reverse the declining trend of drug efficiency. It currently costs about US$2.6bn to develop a successful drug, but patents and exclusivity often expire 10-15 years later.
• Early evidence suggests that generative AI could lead to faster, cheaper drug trials with a higher probability of success, which could lead to an improved quality of care at a lower cost.

Deidre Cooper – Portfolio Manager, Global Environment

• The current market narrative is that higher interest rates make the investment required for the energy transition unaffordable. Yet, while it is true that capital costs are important – the transition generally involves upfront spending in order to save money later – renewable energy is still cheaper than traditional sources in many places.
• At current capital costs, the energy transition is still eminently achievable. And whether measured by wind and solar installation rates, electric-vehicle sales, or energy-efficiency metrics, growth remains strong across clean-tech sectors. This year, US$1.7 trillion will be invested in clean tech vs. US$1.1 trillion in fossil fuels.
• Also, not everywhere is in a policy-tightening cycle. China, the world’s biggest market for clean tech, is loosening. Clean-tech growth in China is extremely rapid, with solar installations for example up 160% year-on-year, and electric vehicles now accounting for almost one-third of auto sales.
• We are also seeing exciting growth in earlier-stage clean technologies. Supported by generous tax breaks, green hydrogen is likely to see rapid growth to decarbonise heavy industry, and potentially trucking and shipping.
• While regulation can be important, it is far from the only driver of clean-tech sectors. For example, a major switch to lower-carbon processes and products is about to happen in the consumer products sector – there is no regulatory impetus; it is driven by what customers want. Technological change (e.g., more appealing electric cars) is also driving growth for clean-tech companies.
• So, while clean-tech is out of favour, we think there are some clean-tech companies that can be bought with strong balance-sheets, good business models, exciting growth prospects and currently very attractive valuations.

Werner Gey van Pittius – Co-Head of Fixed Income | Varun Laijawalla – Portfolio Manager, Emerging Markets Equity | Juliana Hansveden – Portfolio Manager, Emerging Markets Sustainable Equity | Wenchang Ma – Portfolio Manager, All China Equity

• After a tough decade for emerging market (EM) asset class returns, it’s important to consider how the drivers of this have evolved. The decade-long headwind of rising US dollar strength is (by many accounts) overdone and likely to recede.
• The key factor behind underperformance in the EM equity has also faded as the market has developed and grown; over the past decade, many Chinese equities came into the EM index at peak or high valuations and those companies subsequently saw their earnings growth and multiples derate meaningfully. This outweighed the positive impact of robust company revenue growth.
• Today, emerging markets stack up increasingly favourably relative to developed markets across a variety of fundamental metrics, including debt/GDP, external balances, and growth. This should underpin a stronger regime for the EM asset class.
• While geopolitical trends may paint a bleak picture from a top-down perspective, various EM economies are benefitting from commodity price rises and supply-chain shifts; even in countries that are more directly impacted (e.g., China), many companies are navigating the altering landscape proactively and profitably.
• India’s equity market offers active investors some exciting opportunities, underpinned by favourable structural dynamics coupled with astonishing growth. The challenges, however, are plenty, and include rich valuations, governance risks, and geopolitics. Our approach, which has involved kicking the tyres and spending time on the ground, has made for a rich hunting ground in our portfolios.
• While standard industry ESG measures are of limited use in making meaningful assessments of positions or portfolios, careful, in-team sustainability analysis is invaluable. This is vital for the mitigation of the relatively large tail risks in EM and also for capturing the many opportunities.

John Stopford – Head of Multi-Asset Income | Iain Cunningham – Head of Multi-Asset Growth

• Investors need to rethink how they build the defensive component of their portfolio and broaden their horizons beyond bonds. Bonds don’t always behave defensively.
• Other assets can play a similar defensive role in their portfolio. These include equity stalwarts like Johnson & Johnson which has paid dividends for 62-consecutive years, or infrastructure REITS, where two thirds of income is backed by government contracts. Focus on defensive outcomes, regardless of labels.
• The market is at an interesting juncture. Over the last decade equities have delivered a higher realised return than bonds, at greater risk. The coming decade will see equities and bonds deliver similar returns, but maintain their same risk profiles, according to Ninety One’s Capital Market Assumptions (September 2023).
• At the same time, at the macro level, markets are transitioning from one financial cycle to another. The previous/current last cycle was coloured by China’s economic transition, growth and inflation headwinds, and deleveraging across developed markets. This saw demand for capex and resources fall and allowed the implementation of loose policy, allowing markets to rerate.
• The next cycle will be influenced by geopolitical risk, restructuring of supply chains, defense spending, and climate change investments. These are all resource and capex intensive and could lead to the development of a robust resource cycle over next 5-10 years.
• This cycle will see a higher and more volatile inflation impulse, one that will increase asset class correlations, and more volatility in central bank hiking cycles. Equity multiples will compress, reducing valuations, and allowing expected returns from global equities to rebuild over time.
• The fundamental message is to ensure a portion of your investment portfolio is defensively positioned. However, the old rules no longer apply, and one needs a different way of thinking for a different world order. Bonds are not the only defensive asset class!

Clyde Rossouw – Portfolio Manager, Global Franchise

• There has been very narrow leadership of the stock market in 2023, led by tech. Despite the underlying environment, staples stocks have lost out. It’s important that investors question this, and don’t overlook parts of the market which look out of favour.
• Artificial intelligence has arguably driven artificial valuations. Collectively, the ‘Magnificent Seven’ have delivered a total return of 84% this year, yet the cumulative forward earnings-per-share growth for this cohort is only up by 31%.
• The outlook remains uncertain, and there is plenty of earnings risk out there. Consensus EPS forecasts have continued to retrace from elevated levels, but a combination of negative earnings risk and valuation risk is what investors need to avoid as losses can be heavy if both occur at the same time.
• For us, sticking rigidly to our Quality characteristics is sacrosanct. A company must have high quality profits, attractive growth rates, superior profitability and low leverage for us to consider inclusion into our portfolio.
• Importantly, on the leverage point, the market is not paying much attention to the huge amount of credit that is due to roll over to much higher rates between 2024-26. A number of businesses will struggle in such an environment, but quality companies are more likely to be insulated from such risk.

Tom Peberdy – Investment Director, Fixed Income | Victoria Harling – Head of EM Corporate Debt | Tomas Venezian – Portfolio Manager, Latin American Corporate Debt

• After a period of heighted volatility and a stream of negative news flow around high-profile companies and sectors, fear is keeping many investors on the side-lines. This will shift once rates markets stabilise, and default risk expectations catch up with reality.
• Over the past few years, many EM companies – particularly in Latin America – have built strong buffers: deleveraging; focusing on cashflow; and taking advantage of cheap finance when rates were low. The asset class is on solid fundamental foundations to withstand headwinds.
• While fundamentals have been resilient to date, margins are beginning to be squeezed and revenue pressure continues – particularly in sectors and countries where it’s harder to pass on inflation to end customers. Defaults will inevitably rise, but not to the extreme levels currently priced into markets.
• Many EM economies – especially in Latin America – are nearing or at the end of rate-hiking cycles, which supports the macro backdrop. However, oil-price uncertainty relating to rising geopolitical risk could stymie positive inflation dynamics in some markets.
• Expect a bifurcated market: some distressed high-yield companies will struggle to refinance over the next few years; others will prove not competitive enough to survive; but many will thrive. We believe the blanket excess risk premium seen across the asset class offers bottom-up investors an unprecedented opportunity – with limited supply and plenty of buyback activity boosting the market.
• Interesting areas to watch: renewable energy companies in Latin America, where deals are being signed with Middle Eastern nations; similar dynamics in India, Turkey and China, where negative sovereign headlines mean corporate debt investors can earn an extra premium.