The annual Citi Wealth Outlook 2024 provides some intriguing investment ideas for 2024 portfolio allocations. The opportunities are mainly driven by disruptions in two key sectors: technology and capital markets. The technological disruptions will be mostly driven by the rise of AI, increasing cybersecurity threats and move to clean energy. Increased regulatory burden and low profitability of traditional capital providers will lead to more interest in private asset classes. Is this a temporary dislocation or more permanent capital markets change remains to be seen. Unsurprisingly, several of the ideas overlap with major technology breakthroughs in 2023 that will ripple through in 2024.
1. Semiconductor equipment makers: In the past year, the economy experienced two significant changes: a surge in artificial intelligence and increased infrastructure investment by AI service providers. Despite a rise in AI chip design competition, a surprising trend emerged in the past couple years: the market capitalization of top semiconductor designers has outpaced that of semiconductor equipment makers. Also, the US government and its trade allies are offering industrial subsidies to diversify the highly concentrated semiconductor supply chain. Whatever the success of this diversification effort, it points to a strong prospective spending on semiconductors and particularly on equipment makers.
2. Cybersecurity shares: As geopolitical risks rise and critical elections are forthcoming in various countries, the manipulation of news, data, and images is expected to increase. From political hacks and infiltration attempts to corporate cyber threats, the cybersecurity will be one of the most important topics in 2024. The US firms say they will prioritize cybersecurity in their IT budgets, often outsourcing to augment in-house capabilities. However, despite strong earnings growth in the cybersecurity sector, the stock valuations remain relatively low, suggesting potential for significant growth in 2024.
3. Western energy producers, equipment and distributors: The necessity for diversified energy sources, both for economic stability and geopolitical reasons, enhances the value of investing in oil and gas producers, pipelines, and equipment makers as they offer potential income and hedge against shocks and inflation.
4. Copper miner equities/ clean energy infrastructure: Copper, essential for electrification and with constrained supply, is a promising investment. Battery technology advancements could affect commodities like lithium, but copper remains crucial for electric vehicles and infrastructure. Whilst no single commodity should dominate a portfolio, profitable copper producers are considered a lower-risk, growth-correlated option in the energy sector.
5. Medical technology & tools companies: In the healthcare sector, whilst some large companies with new drugs saw significant share gains, many others, including early-stage biotechs, telehealth providers, and others struggled due to rising financing costs and regulatory challenges. Despite recent share price declines, the sector is expected to rebound with increased merger and acquisition activity, as larger firms acquire smaller ones with promising drug candidates, leading to a new phase in healthcare investment. Particularly, affordable tech and tools could see a substantial rebound in 2024.
6. Defence contractors: The conflicts in Ukraine and the Middle East have reignited historical tensions, which lead to increased defence spending by NATO countries to prevent larger conflicts. Consequently, US and European defence equipment and arms producers are under pressure, with their share prices affected by concerns over government funding and their ability to meet rising demand. Despite the challenges, it is very likely that Western defence agencies will do what they can to ensure these companies catch-up with the demand.
7. Private capital asset management firms: In 2023, US bank equities underperformed with a -6% return, a 35-year low compared to the S&P 500. This underperformance could potentially be attributed to regulatory pressures, including higher long-term debt issuance costs and increased capital requirements. The regulatory environment creates major opportunities for private capital managers and alternative financiers. This can be done either by simply buying stock in the listed managers or through other vehicles available in the alternatives markets for qualified investors.
8. The Japanese Yen and yen-denominated Japan tech, financial shares: Once the world's strongest, the Japanese yen has been weak for a while. However, Japan's economic revival indicates a potential currency reversal in 2024. Unlike other central banks, the Bank of Japan maintained low or negative rates during inflation spikes. With Japan's inflation averaging 3.6% over two years, a policy shift seems imminent. Investors can benefit from this by investing in Japanese banks or globally competitive Japanese tech firms in semiconductor, battery, robotics, and automation sectors, which may thrive alongside a strengthening yen and economic growth.
9. Private credit and structured debt securities: Private debt has grown rapidly among institutional investors in the past several years. Limited availability of syndicated loans and cautious banking practices due to potential regulatory changes have increased demand for direct lenders, especially in middle-market and technology sectors. This demand has spurred new investment channels like non-traded business development companies and interval funds. For more liquid public market options, structured credit offers promising yields, with mortgage-backed securities yielding 6.5-7.5%, and even higher for investment grade commercial mortgages and asset-backed securities.
10. Normalisation of the US yield curve: For the past 60 years, the US Treasury 1-year/10-year yield curve has mostly been positively sloped, but it's been inverted for the last 15 months. Strategies with a two-year duration can offer high cash yields, with the potential to enhance Treasury yields or access higher-yielding opportunities. Conditions like a recession or inflation spike, unfavorable for equities, could steepen the curve, making these strategies useful risk hedges. However, there's a risk that the curve may remain inverted or not steepen enough, potentially reducing the strategy's value.
Gintare Hennick
