Lofty tech stock valuations, rate cut delays and geopolitical shifts may have investors worried about what’s next for equities in 2024. But, while risks of an economic slowdown remain, the potential for unlocking new shareholder value is also strong. Despite the potential for slower growth, we see four sector trends which are particularly encouraging.
Healthcare bounces back from a bear market
After a multi-year bear market, many biotechnology stocks still trade below the value of cash on their balance sheets. Meanwhile, the broader healthcare sector’s total return lagged the S&P 500’s by more than 20 percentage points in 2023, suffering from a sharp slowdown in Covid-related product sales.
And yet, the healthcare sector is ripe with innovation. Last year, the Food and Drug Administration approved a record 73 novel medicines. These drugs are now beginning what will likely be a 10-year revenue cycle, including in new end markets with multi-billion-dollar sales potential. Recently approved GLP-1 drugs for diabetes and weight loss, for example, are already annualizing more than $30bn in revenue and are forecast to reach roughly $100bn in sales by the end of the decade.
AI set to spread and strengthen
As in 2023, artificial intelligence (AI) has been one of the biggest market narratives in 2024. This year, however, the trade has started to evolve. Only five of the Magnificent Seven mega-cap tech companies that rocketed into the stratosphere last year have continued to see gains in 2024. Meanwhile, other stocks are starting to catch what looks like an AI tailwind.
For example, since October 2023, utilities have rallied sharply. A recovery trade and the prospect of falling rates likely explain part of the gains, but another reason could be a growing appreciation for the energy demands that AI is creating.
The data centres that train and host generative AI programs are expected to account for an estimated 8% of electricity usage in the US by 2030, up from 3% in 2022. That, in turn, is forecast to drive sizable investment in energy infrastructure, boosting utilities’ long-term earnings growth potential.
We see similar stories beginning to play out in other areas of the economy, building a case that AI is still in the early chapters of its story. As such, we believe mega-cap tech companies that continue to invest and innovate in AI could see more revenue and free-cash-flow growth.
Valuation gaps present opportunities in China
The continued outperformance of US tech has exacerbated a global gap in equity valuations.
The spread has grown so much that any whiff of positive news can lead to big rallies for beaten-down markets. Hong Kong’s Hang Seng Index, for example, was among the worst-performing indices in 2023 (down -10.5%), as well as during the first quarter of 2024 (-2.5%). Then, in mid-April, the benchmark did an about-face, surging more than 20% in one month as news of government stimulus combined with rock-bottom valuations.
But China is also up against some acute challenges, including a distressed property market, lacklustre consumer demand, and mounting trade tensions that threaten to curb Chinese exports – a main driver of recent economic activity. So, while some Chinese corporations have exciting growth stories, an investment strategy based on valuation alone could face near-term volatility.
European markets make a case for themselves
Encouragingly, fundamentals are turning more positive in other markets. In areas where valuation and fundamentals unite, potential exists for stocks to rerate higher more consistently.
In Europe, for example, GDP grew faster than expected in the UK and the European Union in the first quarter of 2024. As such, European indices have traded largely in line with the US year to date.
There are reasons to believe the positive momentum can continue: roughly 18 months of inventory destocking in manufacturing is winding down and both the Bank of England and European Central Bank have signalled the potential for at least one rate cut in 2024.
Europe has also nurtured its own group of mega-cap leaders in sectors such as healthcare, semiconductors, and retail. And it has overseen a 62% rise in military spending from a decade ago, which is swelling the order books of European defence contractors.
These four overarching trends all point to a broadening of equity opportunities for the remainder of 2024. Investors should look for a combination of fundamentals and valuation, especially amid elevated interest rates and wider risks to economic growth.
Lucas Klein is head of EMEA and Asia Pacific equities at Janus Henderson Investors. The views expressed above should not be taken as investment advice.