Schroders Outlook 2024: Equities in the age of the 3D Reset

Alex Tedder

Tom Wilson

The mega-themes reshaping the world economy provide a wealth of opportunities and risks for global investors in equities. Taking a global view, Alex Tedder and Tom Wilson look across developed and emerging markets for the sectors, countries and themes best placed for the period to come.

Global and thematic equities

Alex Tedder:

Beneath the surface of some respectable returns for global equities in 2023, with the MSCI World so far up 9.1% in USD terms, the picture is anything but benign.

A confluence of factors, associated with what we’ve called the 3D Reset, is driving a regime shift of major proportions. Structural challenges that were already apparent before the pandemic are becoming acute.

In 2024 uncertainties will persist and equity markets are likely to remain volatile. As always, however, the old adage that “there is always a bull market somewhere” may prove accurate. In fact, we think there are a number of areas that may prove highly profitable for global equity investors next year.

The 3D Reset and the end of the free money era
Perhaps the most striking feature of financial markets in the last decade was the steady decline in the cost of risk. With post-Global Financial Crisis (GFC) central bank policy driving down interest rates to zero, the effect on asset prices was dramatic; they went up, a lot.

Then came the pandemic, closely followed by the war in Ukraine, events which served to crystallise pressures that had been building for some time.

There are many different factors at play, but we think they can be usefully grouped into three categories, namely 1) Demographic constraints; 2) Decarbonisation imperatives; and 3) Deglobalisation initiatives. Together, they form what we’ve called the 3D Reset.

Combined with high sovereign debt levels, these factors have created supply bottlenecks, driven up wage costs, boosted general price inflation, and underpinned populist politics. Central banks have been forced to act decisively. Interest rates have been raised dramatically and look set to stay that way for some time. No wonder financial markets are jittery.

Time to do the opposite of what you did in the last decade
Hindsight is always 20/20. Looking back over the 10 years to 2021, there were only a few things that global investors needed to have done: buy equities; invest in growth (especially technology); invest mainly in the US; not worry about valuations; lever up (finance with debt).

Anyone following this approach would have done superbly well, and many investors did.

But the 3D Reset is now ongoing and the implications for investors are substantial across most asset classes.
Most obviously, cash is no longer trash: money in the bank can get you respectable returns.

For equity investors a change in mindset is needed. This involves:
- more diversification across regions (less US, more of the rest of the world)
- more focus on the implications of structural change
- renewed attention to valuation, quality, and risk.

We examine each of these below.

Look beyond the US; particularly to unloved markets like Japan and the UK
As Warren Buffett regularly reminds us, it’s tough to bet against the S&P500. Since the end of 2010 the S&P has delivered, in US dollar terms, a cumulative return of 340% compared to 95% for European equities and just 20% from emerging markets. China has delivered a negative return over that period.

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