Outlook 2024 - Overview
07 December 2023
Following a year 2023 that was challenging on many levels, we are looking towards 2024 as a year ripe with opportunities.
As 2023 draws to a close, it has been another challenging and volatile year for our strategies, particularly in healthcare and renewable energy. These struggles mirrored the enduring market difficulties that took root in 2022. Nevertheless, the end results was a disparate array of performances, with some of our strategies recording their best year ever.
Throughout this year, the market's focus revolved around the impending trajectory of U.S. interest rates. Heightened market fluctuations, driven by tightened liquidity and considerable asset shifts toward money market funds, offered a mixed bag of hurdles and opportunities. Notably, the average cash allocation in investment portfolios soared to 10.2%, a surge from the 10-year average of 7.2%.
At the end of 2022, we projected that the "higher for longer" interest rate scenario would benefit growth strategies like ours going into 2023. We anticipated the bulk of rate increases was behind us and expected a resilient economy would translate into earnings that could exceed expectations. The reality was a rollercoaster market environment, with investors frequently anticipating a rates pivot, only to be forced to reset their expectations by persistent hawkishness from the FED.
This was particularly evident in late July 2023, when the FED, after hiking rates on concerns about inflation risks, suggested the possibility of further rate hikes. Despite no actual further hikes taking place, the announcement triggered a sell-off in long-term bonds and equities across our investment themes which has yet to be fully recouped.
Meanwhile, within AtonRâ, the year was a testament to transformative growth and adaptation. Despite marked outflows, we confronted these challenges head-on by restructuring our organization.
Our team's dedication to developing a more effective risk management tool has substantially strengthened our ability to mitigate 'unwanted' risks across our diverse portfolio of themes and stocks. We invested considerable time refining the granularity of all our themes, leading to a marked improvement in allocating our sub-themes and stocks across all products. This fine-tuning aligns perfectly with our commitment to continuous improvement and innovation.
A further strategic milestone was the spin-off of our software development segment. This move has empowered the new entity to pursue its unique growth strategy while enabling us to sharpen our focus on our core business.
Looking ahead to 2024
Looking forward to 2024, our anticipation is fuelled by a reinvigorated structure at AtonRâ: more agile, focused, and resiliently capitalized. With a clear vision, the AtonRâ team can confidently navigate and thrive in any market. Our relentless commitment is to deliver superior performance and service to our customers.
In assessing the broader economic landscape, the anticipation of a U.S. recession still looms large, although it hasn't yet materialized. We believe that the FED is unlikely to increase rates further, given the current gap between the core Consumer Price Index (CPI) and the Federal Funds Rate. However, a more dovish Fed stance requires a substantial reduction in inflation, which would likely be achieved only through a U.S. recession. Indeed, there are palpable signs of stress in the economy, such as growing delinquencies in U.S. consumer loans, especially in auto and credit card segments. However, the most critical problem lies in student loans, representing a significant portion of household debt. The recent conclusion (in October 2023) of the moratorium on student loan repayments amplifies the looming debt burden.
The nature of the recession, whether a soft or hard one, is a crucial question for the market. Considering the slow growth in China, the recession in Europe, and declining consumer and business confidence in the U.S., a hard landing is not such an unlikely outcome.
This economic backdrop casts doubt on corporate earnings surpassing expectations in 2024. In such a scenario, the unavoidable market's initial adverse response would shift the focus towards the Fed's response, which is most likely to be in the form of rate cuts. Such a scenario would favor companies exhibiting robust revenue growth, aligning well with our growth-oriented strategies.
Regardless of the broader macroeconomic landscape, we believe our investment themes are well-positioned to capitalize on the highest growth potential sectors of the economy. By focusing on premier pure-play companies poised to be tomorrow's market leaders, our themes, which span areas like aging, climate change, and technology, share a common attribute: superior growth potential that tends to yield higher profits over time.
Illustrating this trajectory, the Nasdaq 100's current valuation for FY2024 stands at a P/E of 24.3x, combined with an anticipated earnings growth of 15.8%, or a PEG ratio of 1.5x.
In contrast, the AtonRâ fund exhibits a more substantial growth potential. For FY2024, it has a P/E ratio of 59x with an expected earnings growth of 91%. This leads to an exceptionally low PEG of 0.65x, a level hardly ever seen and too compelling to overlook. Even if we consider the earnings forecasts for the next three years (a more widespread method for calculating a PEG ratio), the PEG remains undemanding at 0.85x vs.1.6x for the Nasdaq 100.
The underlying reason for the AtonRâ fund's relatively lower valuation is not that the market is overvaluing larger companies, as a PEG of 1.5x is within the normal range for growth companies. Instead, in our opinion, the market is excessively discounting the value of smaller companies. This can be evidenced by the AtonRâ fund’s median market capitalization of $11bn, compared to the Nasdaq 100 median market cap of $280bn.
The AtonRâ fund's exceptionally low PEG ratio, coupled with its impressive growth trajectory, suggests that it holds the potential to outperform the broader market significantly. As the market gradually recognizes the fund's true value, investors who seize this opportunity can expect to reap substantial rewards.
Throughout the subsequent paragraphs we summarize the key aspects of our investment themes. Investors interested in more detailed analyses are encouraged to click the provided links for comprehensive notes on each theme.
ARTIFICIAL INTELLIGENCE & ROBOTICS
AI & Robotics was a strong performer throughout 2023, driven by the ChatGPT hype. However, in our opinion, this is not just a fad, and we expect AI technologies to continue maturing at high speed in 2024. This will give birth to new applications that we believe will become central to many personal and professional lives, from healthcare to office jobs.
The consequences will be a shift from hardware to software: the former will not disappear, but most of the value will be derived from the latter, especially as we expect rising competition in inference hardware as large players become weary of Nvidia’s dominance.
As another significant consequence, we see the data segment primarily benefiting as businesses will want to prepare for the possibility of customizing their own AI models requiring calibrated and optimized datasets. Physical automation will not remain on the side of the road either, with emerging technologies enabling a considerable boost in productivity.
In conclusion, the AI & Robotics sector is not just riding a wave of innovation but creating a tsunami of transformative technologies. Its impact on various sectors is just beginning to unfold, promising not only lucrative investment opportunities but also a revolution in how industries operate and how we perceive the boundaries of human potential.
2023 marked a turning point for our Bionics strategy and the broader MedTech landscape. The disruptive emergence of GLP-1 drugs initially raised concerns, leading to a substantial market correction and nearly $400 billion in capitalization losses. Despite this, sectors like diagnostics and medical imaging demonstrated resilience.
Investors’ initial concerns about GLP-1 drugs’ impact on the industry evolved to a more balanced view, acknowledging the potential complementarity with medical devices in improving patient outcomes. Additional clinical data and comparisons with established treatments (e.g., statins) suggest a manageable impact on the MedTech industry.
Looking towards 2024, promising sectors include sequencing, medical imaging, and therapeutic devices, with AI playing a key role. Clinical outcomes from GLP-1 trials, ongoing innovations, and advocacy for better reimbursement policies are the key catalysts for next year.
A compelling research note from McKinsey suggests a surge in revenue growth expectations for small-to-mid-sized MedTech companies, highlighting their potential compared to larger, more stable counterparts. Our unwavering confidence in the companies we invest in stems from their ability to capitalize on this exciting growth trajectory. We see the current underperformance as a clear opportunity to acquire these promising companies at attractive valuations.
The biotech industry went through its third consecutive year of negative returns, a scenario that has only occurred once in its 43-year history. The current downturn mirrors the 1992-1994 slump which was followed by a remarkable recovery, and today's challenges echo past obstacles, including legislative pressure and rising interest rates.
The biotech sector now stands at a pivotal juncture. This is even more significant knowing that Big Pharma derive ~50% of their revenue from biotech products (66% of which they acquired through M&A or licensing). Yet, the whole biotech sector is worth a mere 6% of the pharma sector.
Several significant catalysts are lining up in 2024, with at least five groundbreaking approvals expected, as well as updated projections for anti-obesity drug sales. Although we remain cautious about outsourcing services in the biotech supply chain, we expect great strides for AI in clinics due to reduced clinical trials and cost-saving measures.
In conclusion, the biotech sector is poised at the threshold of significant advancements. Its synergy with AI, big data, and innovative modalities is set to redefine healthcare. Investing in biotech now offers attractive risk-adjusted returns and the opportunity to be part of groundbreaking advancements.
FINTECH / MOBILE PAYMENTS / BLOCKCHAIN & DIGITAL ASSETS
The fintech sector's performance in 2023 was a tale of divergent paths. Blockchain-related stocks and neobanks flourished, with the latter benefiting from the global economy's resilience. In contrast, the mobile payment sector faced challenges such as commoditization, slower growth, and increased competition, leading to underperformance. Investment in Chinese fintech companies also disappointed, affected by macroeconomic uncertainties and weak investor confidence.
Looking into 2024, the potential U.S. approval of a spot Bitcoin ETF represents a watershed moment, democratizing Bitcoin access through regulated stock exchanges. This, along with the expected Bitcoin halving in April 2024, could positively impact Bitcoin's market dynamics. The broader digital assets sector also looks promising, thanks to regulatory progress that could encourage institutional adoption of cryptocurrencies and enhance the legitimacy of digital assets.
In payments, the rise in account-to-account (A2A) payments signals a significant shift. A2A payments are gaining significant traction thanks to payment infrastructure developments and merchants' preference for lower transaction costs.
Furthermore, the fintech sector is poised to see a rapid increase in applications using GenAI. Incumbents, with their resources, are positioned to be the first movers and gain a competitive edge. However, a new generation of companies is also entering this market with innovative, out-of-the-box product offerings. Making financial services more automated and easier to understand is necessary for billions worldwide who lack access to basic financial resources, marking a significant step towards global financial inclusion and empowerment.
SECURITY & SPACE / CYBERSECURITY
In 2023, Security & Space witnessed a formidable resurgence of cybersecurity, which will last well beyond 2024. Concerns over the growth potential have vanished in front of the naked truth: cyber threats are more present than ever, and cyber defenses have much room for improvement. Executives are now held accountable for hacks. New technologies create even more uncertainty but generate a massive opportunity for players with differentiating innovation.
Innovation is in no shortage either in the space segment. Although, in what remains a capex-intensive industry, high interest rates have made their first victims among early-stage players, the sector is reaching a tipping point. The private mindset initiated by SpaceX is slowly infusing every corner of the market, powering a profound transformation that is only starting to unfold. New-generation space-based applications will finally reach the mainstream stage, enabled by more accessible access to space.
Both sectors will keep benefiting from innovations from the defense world, which is witnessing a surge in interest following the lessons learned the hard way in Ukraine. Both sectors will offer substantial investment opportunities in segments that adapt to change and are at the forefront of technological evolution.
Our Sustainable Future strategy navigated a challenging environment in 2023, grappling with macroeconomic headwinds, geopolitical unrest, lower electricity prices, high inventory levels, and subdued demand in specific sectors.
Higher interest rates mainly affected large renewable projects reliant on debt financing, especially solar and wind, where upfront capital constitutes a significant portion of lifetime costs. This led to delays and cancellations when profitability was threatened. Additionally, the dip in electricity prices, notably in Europe and the U.S., extended the payback period of residential solar installations. Despite these setbacks, industry fundamentals remained robust. For instance, new solar installations exhibited over 50% YoY growth, and electric vehicle sales are projected to reach 13.6 million units this year, marking a 30% increase from the previous year. Furthermore, the prices of several clean technologies, including solar panels and lithium-ion batteries, have reached record lows, potentially accelerating customer adoption rates.
Looking ahead to 2024, we anticipate significant policy clarifications to further bolster the industry’s growth trajectory. Key developments include a more comprehensive understanding and implementation of the U.S. Inflation Reduction Act (IRA) and the European Union's Net Zero Industry Act.
High inventory levels, particularly in solar modules and inverters, are expected to be resolved in the year's first half, leading to a normalization of supply and demand imbalances. Having experienced a slower-than-anticipated post-COVID recovery, China is showing signs of rebounding. This trend is expected to gain momentum in 2024, especially in critical cleantech sectors, aligning with global industry growth and recovery.
FED's pivot. A change in FED's stance, leaning towards rate cuts, will ignite rotation back into mid and smaller caps growth-oriented stocks.
Regulation. A flurry of impactful regulatory decisions are expected for 2024 across most of our investment themes.
Corporate earnings. A surprisingly strong earnings delivery through 2024 would significantly boost equities and valuation multiples.
U.S. hard landing. If the U.S. economy tanks, equities will not come through unscathed.
Inflation. A renewed outbreak of inflation would corner the FED into the hawkish camp and put pressure on valuation multiples.
The biggest election year in history. 2024 will be remembered as the biggest election year in history. With that, some volatility is to be expected.
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