This year has proved surprising at many levels: rising interest rates sent shockwaves through the banking and property sector, China failed to reignite its economy and European manufacturing and services indices all pointed to recession.
Bond markets had screamed the R-word for a while, with a widely advertised yield curve inversion. Yet equity markets managed a spectacular recovery, with the Nasdaq posting its strongest first half on record (+39 per cent).
There is much debate around the very narrow nature of this rally, especially in the US, where it left many investors frustrated.
However, there is less debate on the reasons behind this synchronised market recovery, namely the perception that the Federal Reserve may pull off a soft landing.
There are signs of receding inflation in the US, little drama among American consumers, and a still-resilient job market.
The earnings season seemed to vindicate that view with delayed price increases and falling costs often working as a welcome tailwind for margins.
Rather than adding our voice to this macro debate, as stock pickers we focus on the specific sector and company dynamics shaping this market cycle. We use these to build portfolios designed to be resilient across the economic cycle.
Three topics caught our attention since the start of the year: post-Covid-19 normalisation, the emergence of artificial intelligence as a disrupting factor and the energy transition that is shaping secular growth opportunities amid a softening economic cycle.
Navigating post-Covid normalisation
Yes, Covid sounds like an old story. Yet its profound effects on business demand, trade flows and supply chains still resonate.
Certain industries, such as air travel, saw demand vanish in 2020, with commentators until a few months ago forecasting a slow and painful recovery.
Other businesses saw rocketing demand in the 2020-22 period for everything from leisure equipment to shop-bought (“off-trade”) alcohol, or biological drug manufacturing, with most commentators suggesting a new normal.
It turned out both buckets eventually saw demand return to something closer to pre-pandemic averages.
The restocking and destocking of inventories are now amplifying this normalisation trend. Our job is to look beyond the mean reversion and find opportunities in both buckets.
After the collapse of air travel, tourism has rebounded dramatically in 2023 – passenger traffic rose by almost one-third in June 2023 compared with a year earlier, according to the International Air Transport Association.
But air travel is still not back to pre-Covid levels, and we see pent-up demand in the industry creating room for travel to exceed pre-pandemic levels.
Meanwhile, supply chains remain tight, which means demand may well outstrip supply for a while in segments such as aircraft engines.
Among former Covid "winners", a combination of normalising demand and distributor ordering patterns undermined growth this year.
Once inventories have diminished, we will see investors focus again on healthy secular trends.
The impact of AI and market dynamics
With the public discovering the wonders and oddities of Chat GPT, AI has been wildly debated.
