Lessons Learnt and the Road Ahead – Finding Opportunities in 2024

Lessons learnt and the road ahead – finding opportunities in 2024

It feels as if “it has been a tough year for investors” has become something of a mantra in the investment industry – and the past three years have certainly delivered their share of surprises. With the benefit of hindsight, it appears increasingly likely that the Covid-19 pandemic marked an inflection point for both market structure and behaviour. We have argued that this is the result of imbalances accrued during the period after the Global Financial Crisis (post-GFC period) having to unwind, and while the process is far from simple or linear, it will have profound impacts on the returns investors can expect from the various asset classes in the next decade.

Our experience over the past three years highlights how dangerous focusing on short-term forecasts and binary outcomes can be. At the beginning of 2023, consensus was that the US would fall into a recession soon, and yet here we are nearly at the end of the year, with debates about the onset and potential form of the recession still raging. Similarly, investors who decided to abandon risk assets following on the Covid-19 market crash, would have missed out on strong market returns since.

The story of 2023, however, has arguably been the continued performance rally of the
‘Magnificent 7’ stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta), which has also been driving increasing levels of market concentration. How long the latest tech rally is set to continue, fuelled by artificial intelligence (AI) euphoria, remains to be seen. However, at times like these investors are well served to remember that good companies do not necessarily make good investments.

The Magnificent 7 have led the index higher in 2023

Sources: Bloomberg and PSG Asset Management

Microsoft has been here before, having seen an immense ramp-up in its share price during the
Dot Com era, only to have its share price languish for several years thereafter. Overpaying for an asset is a surefire way to put a damper on long-term returns. And when markets are pricing for perfection, there are plenty of sources of potential disappointment in the future.

Microsoft share price – then and now (Indexed to 1 USD)

Microsoft share prices indexed for comparison purposes. Dot Com = September 1992 to December 2008.
Now = January 2009 to 5 December 2023. Sources: Bloomberg and PSG Asset Management.

Nevertheless, market participants’ eagerness to crowd into popular areas creates many opportunities for more price-sensitive investors to uncover underappreciated gems. There are many great companies with sound business models and management teams that are not part of the currently trendy monikers and acronyms, and that trade at attractive valuations. The prospects for success of these less-popular companies are arguably just as good as those of their catch-phrase counterparts, but by buying them at a wide margin to safety, the odds are tilted in the favour of patient long-term investors. In many cases, disappointment or headwinds have been priced into the performance of these less-popular shares, and any turnaround or positive news could have a material impact on the share price going forward.

Our bottom-up, 3M investment process is geared towards uncovering hidden gems trading at attractive valuations, and we believe it positions us to help our investors achieve investment success, especially in the currently unpredictable environment. Investors looking to navigate markets successfully in the new year, would be well-served to look beyond the short-term noise or trying to position portfolios for binary outcomes. Ensuring a portfolio is structured appropriately for a client’s needs and risk profile, and is well diversified, remains the best course of action.  

We share more insights into lessons learnt over the past three years, and our thoughts on how investors should navigate the turbulent times that we anticipate lie ahead, in our latest video.

Thank you for your continued support, and we wish all our investors a blessed festive season and a prosperous new year.

Anet Ahern is the Chief Executive Officer of PSG Asset Management.