It has been another challenging year for investors – with geopolitical shocks, sluggish economic growth and interest rates ratcheting up – but this period has also presented many opportunities, helping Bankers Investment Trust to raise its dividend for the 56th consecutive year and offer a share price total return of 5.9% over twelve months (to 02/01/2024).
It helps that the £1.5bn trust has a flexible structure designed to access growth and income from around the world with no limits on individual country or sector exposures. This global approach is evident in the six regional sub-portfolios that form the trust: UK, North America, Europe ex. UK, Japan, Pacific ex. Japan and China.
A key theme of 2023 has been the continued rise of the Magnificent Seven stocks, with these giants now dominating returns in both US and global indices due to their size. These tech names – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – now represent nearly 30% of the S&P 500, the most-watched US equity index, and over 20% of global benchmarks. These companies have become such strong performers that even missing just one or two of them can cause an investor to underperform their benchmark.
Their sheer outperformance has thrown the challenges of other markets into even sharper relief. China has had a particularly challenging 2023, experiencing a sluggish recovery from Covid-19 lockdowns that were only fully lifted at the start of the year. Consumers have also been worried by the collapse of numerous property developers, as many Chinese hold much of their wealth in property.
During this period, we have seen value stocks – those that trade at lower valuations than they would be expected to relative to their earnings – perform reasonably well. However, the Magnificent Seven and other growth stocks – companies anticipated to grow their earnings faster than the rest of the market – have outshone them. This dynamic is highly unusual when interest rates are rising, although could be attributed to the AI trend.
Central banks continued to raise interest rates last year to combat inflation which, fortunately, has subsequently fallen rapidly. However, high rates are still suppressing demand and if they remain elevated then there could be more problems ahead.
High rates are just one of the challenges investors will have to consider in 2024. High borrowing costs can be recessionary, making setting rates a delicate balancing act for central banks. One key metric we will be watching is unemployment because if economic growth slows, companies are likely to start letting employees go, which could dampen consumer sentiment and further reduce demand.
Another big question surrounds valuations. Growth stocks have become more expensive in 2023 and companies need to meet the elevated profit expectations that these reflect in 2024. High starting valuations for equities require a healthy economic backdrop to deliver strong earnings growth, in historical periods where that has not transpired the most expensive stocks in the market have come under pressure.
Another thing to remember is that several significant elections are due in 2024, in the US and UK in particular. Perfectly forecasting election results is impossible, but we can’t avoid the fact that changes of government can lead to new economic policies that impact the portfolio. Therefore, there is much to monitor.
Against this backdrop, we are thinking intensely about where the best opportunities for the trust may appear next year. We see no reason why enthusiasm for AI will suddenly stop; however, it will take time to see if it really is a gamechanger for productivity.
The AI boom helped the Magnificent Seven flourish in 2023, but caution is advisable for the more consumer-focused stocks. Some of these companies have been raising profits only through cost-cutting – which is inevitably limited in scope – while sales are harder to grow. As such they may be vulnerable in an environment of slowing economic growth, especially if unemployment increases.
To this end, we are also cautious about financials. Given that inflation is falling, interest rates in turn could well begin to fall which would make it more difficult for these companies to grow profits.
On the other side of the ledger, Pharmaceutical companies are currently on relatively low valuations, following the pandemic-driven mania and subsequent sell off. Several areas are subject to exciting new research and promising innovation, with the sector a typically defensive place – with earnings holding up – in an economic slowdown. Global demographic trends are also supportive for this sector longer term.
With the benefit of our global mandate, we see opportunities in Asian equities. As mentioned, this area has lagged Western markets in 2023 but supportive policies from the Chinese government and falling interest rates in the US could boost the region. Lower relative valuations also present a potential buying opportunity. The specialist sleeve managers for Bankers in these regions can help identify the most attractive businesses, and help the trust deliver on its long-term objectives.
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