What Investment Pros Are Mulling In 2024

Plus a few things I think are being ignored…

Happy new year! Wishing all my readers a happy, healthy and prosperous 2024. Today‘s post brings you my thoughts from one of my favourite (and most exclusive) investment events, one I attend every year. Keep reading until the end for a fun competition and some news about my Forensic Analysis Bootcamp.

Over 40% of you have joined in the last year so you may well have missed my previous write-up of the Edelman Smithfield Investor Summit. This is a limited invitation conference where Edelman staff interview representatives from their clients. There were five panels on macro, equities, credit, ESG and private equity. The sessions are quite thoughtful with serious speakers and an interesting audience.

This year kicked off with a fireside chat with the City Minister who said all the right things. Government understands that if stockmarket returns in London are higher, that means more money for pension funds and savers, cheaper capital for corporates, more investment, and more tax revenues - a virtuous cycle.

I haven’t properly figured out why UK equities are lowly valued – the market multiple is obviously depressed by the adverse sector composition (especially the relative absence of tech). Meanwhile, in the last several years, UK pension funds have derisked portfolios which had been too UK equity heavy.

I am not sure that the answer is lighter regulation. Shorter and more meaningful prospectuses would be no bad thing, but I doubt many companies worry too much about the size of the prospectus; it’s the valuation which is the key factor. I liked one comment he made:

If you take away risk, you end up with a really safe graveyard

The UK market valuation doesn’t bother me as an investor but as a citizen, member of society and taxpayer, it’s a concern.

Macro

The first panel was macro with Blackrock, Janus Henderson and Principal Asset Management represented. There was a consensus that the Fed pivot was key (really!), but the panel offered a wide span of outlooks. These ranged from concern about the lagged effect of tightening to comfort that 2024 was set to be a good year for markets.

Janus Henderson’s concern was based on the idea that rate hikes take two years to have a full effect and they started about two years ago so we could see an increase in defaults in 2024, and hints of this are emerging in high yield.

Blackrock felt there was a risk that central banks might deliver less than markets are assuming. 

Meanwhile, Principal sees further strength from the consumer, a deceleration in inflation, rate cuts in mid-year and a good year for markets. Later, their analyst flagged a risk of higher oil prices squeezing inflation higher that and markets would react badly if the central banks don’t pivot.

Another risk flagged was the slowdown in China. The authorities there haven’t turned the credit taps on as they have in response to previous slowdowns. In the past, this has been a major driver of markets and global economic growth.

Asset classes favoured were private credit (hey, I am just the reporter), real assets at discounts – renewables, property and infrastructure – and US small cap equities which are “amazingly attractive”.

In Q&A, I asked about the Taiwan election and nobody had an answer. I know you don’t want to find something new to worry about so early in the year, but you really must listen to my December podcast with the brilliant James Aitken of Aitken Advisors - his views on Taiwan are especially worth listening to. I was struck that people seem to have overlooked this important issue.

Equities

This was a heavyweight panel with Mathew Beesley, CEO of quoted asset manager Jupiter Asset Management, Gervais Williams, Head of Equities at boutique Premier Miton and Aaron Barnfather, Head of UK and European Equities at Lazard.

The panellists agreed that they are looking for companies which can control their own destiny and deliver revenue growth above an increasing cost base. Williams is cautious on profit margins and the impact of higher rates on indebted companies. Barnfather cited management structures and decentralisation as a key feature. Jennifer Sundberg’s book on the subject was mentioned.

Williams echoed this and was critical of boards which are often not sufficiently commercially driven with non-executive directors preferring safety to returns.

Somewhat surprisingly, Williams was very bullish about the London IPO market and forecast that the number of UK listed companies would double in 5 years. He thinks recent IPOs have been rubbish – particularly THG and some gaming companies. The UK has a lot of capital intensive companies and when the cost of capital was falling, they saw a lot of competition and that pressure should now be easing. Perhaps that will produce the IPOs but he didn’t really explain his rationale.

All the participants were positive on the UK which they see as strong, stable and too cheap.

Jupiter now have 10 data scientists on the team using unconventional data for idea generation and affirmation. They are also using AI to summarise call transcripts and annual reports. In contrast, Premier Miton are maxing out on face to face meetings. Williams likes to use annual reports – websites can change daily but the accounts are set in stone. He also likes to ask companies about non-financial KPIs in meetings. Lazard like to visit companies at their HQs.

The panel’s picks for 2024 were German residential property at a 50% discount to NAV (Lazard); UK small caps (Williams of course – he said “this is a 30 year buying opportunity”); and EM ex China (Jupiter).

Credit

My friend Bruno Duarte of Algebris was joined by April La Russe of Insight and Gurpreet Gill of Goldman Sachs Asset Management. The key message was that bonds are back. Bruno likes big European bank AT-1s which are low risk and offer an attractive HSD yield. Insight are cautious on the growth outlook and see a slowdown without pain as wishful thinking – they see no growth in the US and believe bond yields have a lot of cushion in the price.

There was some discussion about the excess supply of UK gilts and Government bonds elsewhere. One view was that if there were a buyers’ strike, Governments have other tools at their disposal beyond QE, for example selling shorter maturity bonds, or reducing volume. These don’t sound too comforting to me.

The positive case for banks is predicated on the fact that there are far fewer banks in Europe than the US and they are much more tightly regulated. Only 12 US banks have to meet the same scrutiny and accounting standards as all the big European banks and regulators have effectively bullet-proofed the banking system here. I am not totally convinced about this, but there is a 500bp spread on some European national champions vs the local government bond eg BNP in France pays 7.5%. The average AT-1 yields 8-9%.

ESG

Another heavyweight panel with the CEO of Federated Hermes International, Saker Nusseibeh, Jasbir Nizar the UK CEO of Lombard Odier, Nikesh Patel of Van Lanschot Kempen and Erin Leonard of HSBC Asset Management.

The panel agreed that ESG had a communications issue. There was concern that not enough was being done about biodiversity, which has been overlooked and overshadowed by climate change. They recognised that underweighting energy had cost ESG funds performance and likened this to the periods where value underperformed growth, often for years at a time before coming out on top. Nine out of ten investors surveyed believed that the fact that ESG was out of vogue this year is transient.

They didn’t like my question about how we should think about a Trump Presidency, something which doesn’t seem to be getting a lot of discussion by this community. Some of the initiatives set in motion under the Inflation Reduction Act will of course continue, but if the incentives are reversed, the climate change impetus will surely slow.

Private Equity

Deborah Wardle of Mercer was joined by Alex Wolf of Harbourvest, Zak Ewen of Battery Ventures and Colm Walsh of ICG Enterprise Trust.

They expect a difficult operating environment in 2024 and think that managers with longer experience will do better than newer managers. Only the best private companies will be able to IPO. They thought that the NAV lending had been over-egged in the press and that under 10% of GPs had used the mechanism and at modest LTVs at 10-20%. As far as I can see, there is no real data on any of this.

They challenged the view that private equity had not properly marked to market and claimed that they were continuing to achieve realisations at 30% premia to book value. They believe that they had not marked up their values as aggressively as public market multiples in 2021 so it was only natural that they didn’t need to mark them down in 2022. In addition, many of the LPs can see valuations of the same holding across different GPs so there is a self-policing mechanism at work.

You will be surprised that I have some sympathy with these views but the chances are that if economies fade and markets correct, there will be significant fallout among private equity. Even if the outcome is relatively benign, there are lots of overstretched private companies which will get into difficulty.

The industry has not done itself any favours on the PR front and there will be a backlash. I was shocked that some members of the panel had not even read Plunder by Brendan Ballou or These are the Plunderers, a similar book by Gretchen Morgensen; some had not even heard of those books. I have sent them links and will report back on the commentary, if there is any.

As always, it’s an interesting conference with useful quick 45 minute snapshots of sentiment across a range of finance. 

Competition

This is my first post of 2024 and I would love to hear your investment resolutions for 2024. There will be a prize of the best and another for the most interesting. Simply reply to this email and let me know if you would prefer a copy of my book, or Behind the Balance sheet “merch” – I can offer a baseball cap or a polo shirt.

Thanks as ever for your support. I have an exciting schedule for 2024 and love to hear your feedback or suggestions.

Course

Before you go, a quick reminder that our brilliant Forensic Analysis Bootcamp will kick off on February 26. It’s an 8 week programme but with a break for Easter. Free subscribers can save £100 in an early bird offer with the code EARLY.

Premium subscribers can read on for 2024 outlooks and an even bigger discount.