Aargh. Not another mega-something trend

The latest market outlook to flash up on this writer’s screen sent him into a momentary rage. “Aargh, not another mega-something headline,” he fumed, as he scanned through a Cogence 2024 Market Outlook pdf titled ‘The great unknown emerging as new mega forces shape the world of investing’. This communication had followed hot-on-the-heels of a ‘mega threat’ presentation by financial journalist, Bruce Whitfield, during an RGA webinar. 

Mega superfluous

It appears there is a growing cohort of financial services writers, independent or brand-aligned, who believe they can elevate their content by simply pinning the word ‘mega’ to the title; likewise, market commentators believe their ‘mega trends’ are more impactful than the trends their peers identify. Oxford Language describes ‘mega’ as an adjective for very large, huge or excellent, and if you use it as an adjective, extremely. So, for example, if you start with a horror film titled Piranha or Shark you can 10x its effect by rebranding it Mega Piranha or Mega Shark. PS, these have both been tried; resulting in mega (adjective) fish that swam mega (adverb) fast! 

Apologies for the digression, dear reader. Returning to the matter at hand, you will learn that Cogence, a global Discretionary Fund Manager (DFM) in the Discovery Invest stable, supported by Blackrock and RisCura, feels the world is entering a new period of uncertainty, fuelled by the record number of countries going to the polls this year. In keeping with today’s mega theme, the DFM labelled the period “the great unknown”. 

Political and geopolitical uncertainty is a theme that has been shortlisted by a number of global asset managers of late, all of whom are particularly concerned about how the United States election could influence Russia-US and China-US relations in coming years. The SA-domiciled DFM will be watching South Africa’s 29 May national election too, as pre- and post-election positioning puts important policy decision making on the back burner. 

Yesterday, today and tomorrow

The DFM’s 2024 financial market outlook commentary started with a refresher on an exceptional 2023. “Last year surprised many,” they wrote. “In place of a much-anticipated downturn among the world’s developed economies, equity markets delivered robust returns for global investors as artificial intelligence (AI) euphoria took mainstage”. Euphoria is an excellent descriptor for the staggering 110% aggregate gains across the Magnificent Seven technology shares, led by a 248% 12-month surge in Nvidia Corp. 

Global indices shot the lights out too, with the iShares MSCI ACWI, which tracks the performance of large and mid-cap stocks in developed and emerging markets, delivering returns of 22% (in USD) in 2023; the Core MSCI S&P500 ending the year 25.6% higher (in USD); the Core MSCI Europe was 16.1% (in EUR) higher; and the Core MSCI Emerging Markets ETF ending up 11.3% (in USD). The laggard, sadly, was the MSCI South Africa ETF, which returned a paltry 1.6% (in USD). 

Locally, bonds and equities ended a difficult year on the front foot, with fixed income portfolios making a resurgence on strengthening bond valuations. “This led flows into managed ETFs as reflected in the performance of our Conservative Fund which returned 13.67% compared to the Association for Savings and Investment South Africa (ASISA) category average of 11.05%,” said Cogence CEO, Jonel Matthee-Ferreira. 

Why the soft landing is a misplaced debate

Turning to the 2024 outlook, Cogence and its partners commented that the debate around whether the world would achieve a soft landing as peak rates ‘bit’ was misplaced, and that the financial market rally, though welcome, was incredibly narrow. “What should not be overlooked is just how narrow this [rally] has been,” the CEO said. “It has been led by a mere handful of mega-cap American tech companies benefitting from the normalisation of the US economy after the pandemic”. 

To get to grips with financial market prospects over the coming one-to-three years requires deep reflection on “the impact of profound structural shifts currently underway”. These shifts included geopolitical fragmentation; shrinking workforces; and the low carbon transition, all of which are preventing economies from growing at pre-pandemic levels without stoking inflation. PS, this writer was surprised that artificial intelligence (AI) did not crack a mention here, though it was mentioned later in the analysis. 

According to Matthee-Ferreira “central banks are in a wholly different position today compared to where they were a decade ago; they can no longer flood the market with cheap money to accelerate growth”. In this context, the DFM expects a period of higher interest and inflation rates in conjunction with something RisCura describes as “political uncertainty begetting market volatility”. This is an interesting observation, evidenced by the much-anticipated US Federal Reserve interest rate cutting cycle start being pushed deeper and deeper into 2024. 

An incubator for active asset management

“In 2024, globalised active management backed by macro-insights will become essential to enhancing portfolio outcomes as returns become more dispersed across the world’s geographies, industries, assets and themes,” the DFM writes. They supported this statement with analysis from BlackRock that shows a widening in the dispersion of US equity analysts’ earnings estimates, before arguing that investment expertise shines when there is a wider dispersion of views. 

Matthee-Ferreira felt that active management was more important than ever and that in the context of uncertainty, “investors must stay diversified, and they must stay active … to achieve this, you need global expertise and macro-differentiation”. She added that investors relying on static, broad asset class allocations for alpha would struggle in the current investment paradigm. Instead, the focus will turn to portfolio building blocks that sit in the sweet spot of emerging trends, or mega trends if you prefer. It could be that some of last year’s trends persist, led by decarbonisation and digitalisation. 

The DFM expected rapid advances in technology continuing to define value as the AI revolution increases parameters and outputs across economies, sectors, industries and individual businesses. Global asset manager BlackRock agreed, with its recent Mega Forces: An Investment Opportunity report holding that “the biggest investment impact may come from AI’s interaction with other tech and mega forces”. The focus, according to the asset manager, should be on identifying future winners that are not yet priced by the market. 

Can this 248% winner run harder still?

This sounded like good advice; but this writer wondered how the chief investment officers and portfolio managers at South Africa’s 1800+ CIS funds would find the  guts to invest or reinvest in some of the 2023 winners. After all, who in their right mind would back a share that did 248% in 2023 for a repeat performance? It may help to find stocks “that align not only to digital disruption and AI, but that [also] benefit from demographic divergence; a fragmenting world; the future of finance; and low-carbon transition too”. PS, the last quote is courtesy the aforementioned Mega Forces report. 

“These forces can be seen as portfolio building blocks that transcend traditional asset classes and straddle sectors and regions as they drive corporate profits independently and are not necessarily correlated with what is going on in the macro environment,” Matthee-Ferreira said. Specifically, the macro view for the global allocation in Cogence portfolios is neutral US equities at the benchmark level; but the potential within the AI and digitisation themes elevates the US equities exposure to overweight. 

Active asset management back in focus

Matthee-Ferreira concluded that seizing the opportunity presented by emerging volatility required “active asset management and expertise, macro-insight differentiation and a detailed understanding of the mega forces shaping the world of tomorrow”. Yes, dear reader, perhaps a bit flowery; but overall informing a powerful outlook statement, and a cogent, future-fit approach to portfolio construction that emphasises theme over asset class. 

Writer’s thoughts:

Much has been written under the active versus passive headline, with the former often proving its worth during periods of market uncertainty. Do you favour active- or passive-managed portfolios for the coming political and geopolitical uncertainty? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.