2024: A year for stock-picking

by Hamilton van Breda | 28,Feb,2024 | Investments, M&G Investments, Q1 2024

Contrary to what many pundits had anticipated, most equity markets ended 2023 in strong positive territory. Investor confidence and sentiment were lifted by the increasing belief that interest rates had reached their peak and a US recession seemingly averted, with global equities having delivered a robust 22.2% (in USD – MSCI ACWI Index) for the year.

US equity was a large driver of global equity returns. However, outsized returns in the US market were largely concentrated in AI-related technology stocks, with the tech-heavy Nasdaq returning an impressive 44.6%, while the broader based S&P 500 Index delivered 26.3%. The dispersion of returns, however, means that there are still good opportunities for active investors who are willing to analyse a little further.

Local investors would have been particularly well positioned in global equities, not only due to this impressive performance, but also the depreciation of the rand against the major global currencies which further boosted returns. The rand lost 8.2% versus the US dollar,14.1% versus the UK pound and 12.1% against the euro for the year.

Selectivity required in 2024

However, this does not mean that this performance will repeat itself in 2024. In fact, the risk of a global growth slowdown, or persistently high inflation, could put global equities under pressure. Following the November-December rally, some equity markets have re-rated and are trading at relatively expensive valuations. For example, at the beginning of the year the US S&P 500 had a 12-month forward price/earnings (P/E) ratio of 21.5X, which is elevated compared to the MSCI All Country World Index (ACWI) ex-US at a P/E of 13.1X and the MSCI Emerging Markets Index at 13.8X. By comparison, South Africa’s Capped SWIX ALSI was trading at an attractively low P/E of 10.0X at year end. Meanwhile, the “magnificent seven” US AI-related technology shares were trading at a 37.9X P/E.  So from a valuation perspective, it is more likely that South Africa, other emerging markets and the rest of the world would outperform US equities going forward from here.

No matter what materialises, however, we believe that being selective will be key, especially by focusing on attractively valued companies that are able to benefit from longer term structural growth drivers, rather than those with more cyclical exposure. Current conditions, characterised by greater value dispersion across stocks globally, and even within the same sectors, favour a stock-picking approach for 2024.

For South African investors, global equity can act as a strong diversifier of local SA-specific risk and an important building block in a portfolio. For those looking to add global stocks to their portfolio, rather than trying to do research themselves on the thousands of global companies available to choose from, they should consider taking advantage of global equity unit trusts that harness the computational power of artificial intelligence (AI) to analyse the equity investment universe. There are many such funds that use machine-learning models to help select stocks, providing excellent diversification across different regions and sectors.

Both the data input and output capacity of a machine-learning model is tremendous, processing about 10 billion data points and up to 30 years of historical data, which are used to evaluate the prospects of about 10 000 companies listed on every stock exchange in the world on a daily basis. And because the data is directly comparable across all the stocks being analysed, it offers a significant advantage over traditional research methods. However, in our view, human experience and expertise are also very necessary when it comes to final stock selection: the portfolio manager can apply their understanding of certain non-quantifiable factors that a model may overlook, such as the quality of a management team, conditions in a certain industry or pending regulatory changes. As such, a human “override” is a vital part of the process.

Ultimately, however, machine learning significantly augments the stock analysis component of the investment process, revolutionising the way people invest and leading to better investment outcomes. So, when adding global equity exposure to a portfolio, it makes sense to consider a global equity unit trust managed by experts with the assistance of a proven AI model to enhance performance in the testing conditions of today’s markets.

Hamilton van Breda
Head of Retail Sales at M&G Investments | + posts