Given general expectations of slow economic growth for the foreseeable future, how can investors be nimble and dynamic in such a volatile and uncertain environment?
Andrew: The technology sector offers continuous opportunity for innovation, which creates powerful, long-term secular themes. This changes behaviours of consumers and businesses – just think how we have all adapted to a smartphone enabled world over the past 10+ years in terms of our personal preferences, the way businesses sell to us and the way we interact with them and indeed many new companies rising on the back of it. Over this period, we have seen some great opportunities for investors, despite macro challenges along the way. Recessions have often been key catalysts for new technology adoption. Status quo is often the biggest impediment to new technology adoption and we see multiple catalysts currently shaking up that incumbency with inflation, recessionary fears and geopolitics driving a requirement to do things differently with technology often providing the solution. That’s why we are so excited today, despite macro uncertainty, with the emergence of generative AI as the next major computing paradigm and the potential beneficiaries, as well as the disruption, this will bring. We anticipate a new wave of winners emerging, both on the technology side and through broadening use cases. Our team actively looks for and positions towards those companies where we expect an inflection in earnings and unappreciated earnings growth.
Mike: We believe there are three key areas investors should embrace to effectively navigate the current market backdrop. 1) have an investment team that have experience across multiple market cycles, that is sufficiently well resourced but not so large it hinders quick decision making; 2) integrating top-down macroeconomic factors into portfolio construction to effectively allocate research time and aid portfolio construction; and 3) carefully manage strategy capacity in order to remain nimble with the ability to rebalance the portfolio quickly, if required. These elements are embraced across all of TT International’s high-alpha equity strategies.
Which themes will offer the most attractive risk-adjusted returns in 2024, and why?
Andrew: With the inherent secular growth we expect within the technology sector, and more so today with the developments in generative AI, we anticipate the sector offering attractive fundamentals for investors. With strong balance sheets across many technology companies, we are not overly concerned by the higher interest rates we are now seeing. Nevertheless, technology companies or trends can be susceptible to hype and overexuberant expectations from time to time, to which understanding and managing for this is integral within our investment philosophy. Within our Sustainable Future Technologies approach, we position against eight key themes which we believe are supported by strong global megatrends including ageing population, climate change, resource constraints and rising inequality. Against this, we see attractive opportunities through the delivery of technology-led solutions. For example, those companies that are able to able to drive a low carbon infrastructure or more efficient technologies for electric vehicles, or those that can democratise access to finance, education and healthcare, thus delivering both a social or environmental good and an attractive backdrop for investors.
Mike: We are positive on multiple themes within our Asian equity portfolios despite being cautious of the trajectory for the Chinese economy and stock market. Two high-conviction themes for us currently are the growing spending power of the Indian consumer and also those beneficiaries of the ongoing geopolitical tension between China and the West:
- Data suggests Indian households with >US$35,000 of annual income will grow at more than +16% per annum for the next decade; this will drive strong and sustainable consumption in the Indian economy and we expect domestic travel and leisure to be two huge winners out of this;
- Whilst increasing protectionism is unhelpful for global growth, diversification of manufacturing away from China provides multiple opportunities for growth elsewhere. India, Vietnam and Indonesia are clear beneficiaries of rapidly expanding manufacturing from global multinationals.
How should you adapt investment processes to account for a cautious market outlook?
Andrew: From a technology fund perspective, where one needs to be cautious of hype, we are delighted to see a return to fundamental investing where share prices are correlated to positive earnings revisions as they should be, rather than largely pinned on expectations and the latest themes. Greater dispersion in stock price returns creates more opportunity for stock pickers especially in the technology sector as we transition from the mobile internet era that currently dominates to a future world of AI where new leaders and laggards will emerge. Stock picking based on fundamental analysis is well suited to this environment. While almost zero interest rates and quantitative easing have been the backdrop since the global financial crisis, investors with a track record of stock picking in a world of more normalised cost of capital, coupled with experience of multiple market and tech disruption cycles are well positioned to navigate this new paradigm.
Mike: Investment processes should be disciplined and have been tested in multiple market cycles. To make substantial changes to the process because of market volatility is a mistake. Having said that, fund management teams do need some flexibility and humility when economies and markets do not behave as expected. The test of a fund manager is not when things are going well, but when they are not and one of the great arts of fund management is to risk manage the portfolio effectively in differing environments. When the outlook is cautious or conviction levels are low, a fund manager needs to de-risk the portfolio and then build a ‘shelf’ of exciting stock names to be deployed when the environment is more constructive.
