Thoughts on the Market - Three Investment Themes for 2024 and Beyond

Three Investment Themes for 2024 and Beyond

01/17/24 • 3 min

Elections, geopolitical risks and rate cuts are driving markets in the short term. But there are three trends that could provide long-term investment opportunities.

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Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about three key investment themes for 2024. It's Wednesday, January 17th at 10 a.m. in New York.

Markets will have plenty of potential near-term catalysts to contend with in 2024. There's elections, geopolitical risks as tensions rise with regional conflicts in Europe and the Middle East, and key debates about the timing and pace of central bank rate cuts. We'll be working hard to understand those debates, which will influence how markets perform this year.

But what if you're thinking a bit longer term? If that's you, we've got you covered. As it's become our annual tradition, we’re rolling out three secular themes that Morgan Stanley research will be focused on developing collaborative, in-depth research for, in an effort to identify ways for investors to create potential alpha in their portfolio for many years to come.

The first theme is our newest one, longevity. It's the idea that recent breakthroughs in health care could accelerate the trend toward longer and higher quality human lives. To that end, my research colleagues have been focused on the potential impacts of innovations that include GLP-1 drugs and smart chemo. Further, there's reason to believe similar breakthroughs are on the horizon given the promise of AI assisted pharmaceutical development. And when people lead longer lives, you'd expect their economic behavior to change. So there's potential investment implications not just for the companies developing health care solutions, but also for consumer companies, as our team expects that, for example, people may consume 20 to 30% less calories on a daily basis. And even asset managers are impacted, as people start to manage their investments differently, in line with financing a longer life span. In short, there's great value in understanding the ripple effects into the broader investment world.

The second theme is a carryover from last year, the ongoing attempts to decarbonize the world and transition to clean energy. Recent policies like the Inflation Reduction Act in the US include substantial subsidies for clean energy development. And so we think it's clear that governments and companies will continue to push in this direction. The result may be a tripling of renewable energy capacity by 2030. And while this is happening, climate change is still asserting itself and investment should pick up in physical capital to protect against the impact. So all these efforts put in motion substantial amounts of capital, meaning investors need to be aware of the sectors which will be crimped by new costs and others that will see the benefits of that spend, such as clean energy.

Our third theme is also a carryover, the development of AI. In 2023, companies we deemed AI enablers, or ones who were actively developing and seeking to deploy that technology, gained about $6 trillion in stock market value. In 2024, we think we'll be able to start seeing how much of that is hype and how much of that is reality, with enduring impacts that can create long term value for investors. We expect clear use cases and impacts to productivity and company's bottom lines to come more into focus and plan active research to that end in the financials, health care, semiconductor, internet and software sectors, just to name a few. So stay tuned. We think these debates could define asset performance for many years to come. And so we're dedicated to learning as much as we can on them this year and passing on the lessons and market insights to you.

Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

Elections, geopolitical risks and rate cuts are driving markets in the short term. But there are three trends that could provide long-term investment opportunities.

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Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

Previous Episode

The Growth Outlook for China’s Tech Sector

Although China has emerged as one of the world’s largest end markets for technology, its tech sector faces some significant macro hurdles. Here’s what investors need to know.

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Welcome to Thoughts on the Market. I'm Shawn Kim, Head of Morgan Stanley's Asia Technology Research Team. Along with my colleagues bringing you a variety of perspectives, today I'll talk about the impact of macro factors on China's technology sector. It's Tuesday, January 16th at 10 a.m. in Hong Kong.

Over the past year, you've heard my colleagues discuss what we call China's 3D journey. The 3Ds being debt, deflation and demographics. As we enter 2024, it looks like China is now facing greater pressure from these 3Ds, which would cap its economic growth at a slow pace for longer. Given this investor’s currently debating the potential risks of a prolonged deflation environment. In fact, the situation in China, including the rapid contraction of property sales and investment, default risk and initial signs of deflation, has led to comparisons with Japan's extended period of deflation, which was driven by property downturn and the demographic challenge of an aging population.

At the same time, within the past decade, China has quickly emerged as one of the most important end demand markets for the global information and communication technology industry, accounting for 12% of market share in 2023 versus just 7% back in 2006. This trend is fueled by China's economic growth driving demand for IT infrastructure and China's large population base driving demand for consumer electronics. China has also become the largest end demand market for the semiconductor industry, accounting for about 36 to 40% of global semiconductor revenues in the last decade. As it aims to achieve self-sufficiency and semiconductor localization, China has been aggressively expanding its production capacity. It currently accounts for about 25% of global capacity.

Over the long term, we believe China's economic slowdown will likely lead to lower trade flows in other countries, misallocation of resources across sectors and countries, and reduced cross-border dissemination of knowledge and technology. China's semiconductor manufacturing, in particular, will continue to face significant challenges. As the world transitions to a multipolar model and supply chains get rewired, a further gradual de-risking of robotic manufacturing away from China is underway, and that includes semiconductor manufacturing. In a more extreme scenario, a complete trade decoupling would resemble the 1980s, when the competition between the US and Japan in the semiconductor industry intensified significantly.

Our economics team believes that China can beat the debt deflation loop threat decisively next 2 to 3 years. It's important to note, however, that risks are skewed to the downside, with a delayed policy response potentially leading to prolonged deflation. And this could send nominal GDP growth to 2.2% in 2025 to 2027. And based on the historical relationship between nominal GDP growth and the information and communication technology total addressable market, we estimate that China's ICT market and semiconductor market could potentially decline 5 to 7% in 2024, and perhaps as much as 20% by 2030, in a bear case scenario.

Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcast and share Thoughts on the Market with a friend or colleague today.

Next Episode

Mexico Nearshoring Keeps Going Strong

Many investors think the boom in Mexico nearshoring is losing steam. See what they may be missing.

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Welcome to Thoughts on the Market. I'm Nik Lippmann, Morgan Stanley Latin American Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll focus on our outlook for nearshoring in Mexico. It's Thursday, January 18th at 10 a.m. in New York.

As we've discussed frequently on this podcast, we're seeing a rapid transition from a globalized economy to one that is more regionalized and Mexico has been a key beneficiary of this trend. Last spring, notably, it surpassed China to become the US largest trading partner. But many market participants believe that the nearshoring narrative in Mexico is losing steam following the strong performance of nearshoring-exposed names in 2022 and 23. We disagree. In our view, nearshoring is not cyclical, it's a multi-year structural narrative that is still gaining strength. We continue to believe that nearshoring and subsequent waves could be a long and sustained investment in ways that could bring about new ecosystems in Mexico's well-established manufacturing hubs in the North and Bajío regions. What's more, we believe the next waves of opportunity to be a more comprehensive impact on GDP growth.

The next wave of opportunity will be investment, which we believe is key for 24. After bottoming out below 20% in 2021 the investment to GDP ratio in Mexico is now above 24%. This increase is driven by increasing capital expenditure for machinery and equipment and foreign direct investment, which is breaking through record levels. In the US, manufacturing construction has risen from about $80 billion annually to $220 billion, and it continues to rise. This is mirrored by nonresidential spending in Mexico, which has grown by a similar magnitude. This is key. The nearshoring process reflects the rewiring of global supply chains, and it's happening simultaneously on both sides of the US-Mexico border.

Therefore, we believe that the surge in investment driven by nearshoring could lift Mexico's potential GDP. We estimate that potential GDP growth in Mexico could rise from 1.9% in 2022 to 2.4% by 2027, a significant surge that would allow the pace of real growth to pick up in '25 to '27 post a US driven slowdown. Indeed, in a scenario where the output gap gradually closes by end of 2027, real GDP growth could hover around 3% by '25-'27.

Evidence of nearshoring is overwhelming. Mexico is rapidly growing its 15% market share among US manufacturing imports, gaining ground from China and other US major trading partners. Moreover, as the supply chains and manufacturing ecosystems that facilitate growing exports expanding simultaneously on both sides of the border, investment efforts are also occurring in tandem. The debate is no longer whether re-shoring or nearshoring are happening, but it's about understanding how quickly new capacity can be activated, as well as how much capital can be deployed, how quickly and where.

The key risk when it comes to nearshoring is electricity. There's no industrial revolution without electricity. We've argued that Mexico needs $30 to $40 billion of additional electricity generation and transmission capacity over the next 5 to 6 years to power its potential. This will require a sense of urgency, legal clarity, and collaboration between Mexico policymakers and their US and Canadian peers, aimed at aligning Mexico's policy objectives with the Paris Climate Accord that will push renewable energy back toward the path of growth.

Thank you for listening. If you enjoy Thoughts on the Market, take a moment to rate us and review us on the Apple Podcast app. It helps more people find the show.