Which Global Themes Are Flying?

Only one sleep to go until “Sixmas”, or the 6 Nations. Giddy. Another 28 days to go in the “Freezbrury” cold water swim challenge. Not so giddy. Such is the emotional ebb and flow of life but what do we make of the January investment emotional roller-coaster? Dare we say January was a game of three ‘halves’? The early days of the year saw markets puke, only for the next three weeks to see markets roar higher on familiar big tech AI giddiness, interest rate cut hopes and stronger economic numbers out of the US and Asia. Then, more fear. As always, the cost of money (rates) drives all asset markets. So when the Fed said “not so fast” on March rate cut expectations markets had another little tantrum to close out the month. Now, ignore all that trading noise. Let’s stick to longer-term thinking and revisit a few themes we flagged for 2024.

First, we go big. The “Magnificent 7” big tech names have been driven to new all-time highs on the continuing AI theme with Microsoft hitting a $3 trillion market valuation for the first time, and AI poster-child, Nvidia, adding another 24% to its value in January alone. However, if you’re a Tesla shareholder, you might need access to the Elon Musk drugs cabinet to dull the pain of a January 24% crash in the value of the once biggest EV manufacturer in the world. As we write of potential regime shifts, I am reminded of a mandatory Thursday lunchtime every quarter in the naughties being glued to my desk and screen awaiting Nokia’s latest earnings report from Helsinki. The equivalent global pulse-check these days is one evening every quarter in New York when Microsoft and Google tell us how their cloud(AI) business is doing. This week the update was 30% and 26% cloud revenue growth respectively. Let’s just say theme intact.

Now, go smaller. Well, not so small. On the Microsoft analyst call, Ireland’s very own An Post received a shout out from Microsoft CEO, Satya Nadella, as an example of a customer using its AI CoPilot Studio. This did prompt some thought about small companies and start-ups using AI. We probably don’t give technology and digitalisation enough credit for empowering founders and scaling up businesses over the past two decades. With a website, e-commerce applications, security/payment apps, and cloud hosting/workflow support, a start-up business no longer had to sink capital into up-front infrastructure costs but, instead, could pay software subscription fees (SaaS) to big tech and go to market quickly. This writer is just wondering could AI be an additional accelerant for start-up businesses? Maybe it’s not just me. Review site, Yelp, recently published data on a record 762,200 new US business openings in 2023, up 20% on 2022. Furthermore, US government data confirms the pandemic-inspired “entrepreneurship boom” is alive and kicking going into 2024.  However, some start-ups do need serious up-front capital….

Check out our cleantech theme. The initial construction of huge EV battery gigafactories, renewable energy installations and decarbonised manufacturing (see steel, fertiliser, cement etc) requires billions of investment capital dollars. Encouragingly, we are seeing some really big funding deals get over the line. Sweden’s Northvolt announced a $5 billion debt financing round in January and a week later another Swedish name, H2 Green Steel, raised €4.5 billion in debt and equity. And, it’s not just cleantech start-ups being backed by significant banking syndicates. Despite the gloomy macro headlines, it feels like banks are feeling better about life in general. Note the record $188 billion of bond issuance by US companies in January and the index(ETF) which tracks the US Banks sector (XLF) hitting a 2-year high. No wonder Bloomberg was leading with a headline this week “The Credit Market Is Quietly Booming again”.

Of course, in our earlier 2024 themes article we expected continuing stress in global real estate so it’s not all good news for banks. The slow-moving Chinese train crash of Evergrande finally hit its liquidation wall in the Hong Kong courts but the potentially more significant real estate news came out of Tokyo this week. Aozora bank shares plunged 20% after it revealed a $191 million loss for the year due to write-downs on its loans to the US commercial real estate (CRE) sector.  Meanwhile, back in the US, New York Community Bancorp reported a $185 million charge-off on just two CRE loans and watched its share price crater 38% in a matter of hours.

Expect more of this but the key global credit swing factor will be China. For now, Beijing’s efforts to stimulate the economy is pushing capital into the wider Asian economy as the Chinese manufacturing engine ramps up activity. Evidence of early policy traction across Asia might be seen in the bellwether South Korean economy and its PMI survey of factory activity showing expansion for the first time in 19 months. Of course, with interest rate cuts firmly expected in 2024, central banks and investor want a “goldilocks” outcome rather than economies running excessively hot. We shall see, but in the area of healthcare it sounds like one form of excess has been whipped. More specifically, we are revisiting our weight-loss and healthcare/biology theme.

In recent days Danish pharma company, Novo Nordisk, became just the second European company to  pass the $500 billion valuation mark. Its obesity drugs, Ozempic and Wegovy, have revolutionised the prospects of this 100-year old company and can only focus investor minds on further medical opportunities. We have previously highlighted the intersection of biology and technology as a theme so recent news from Cambridge University was intriguing. Scientists in recent weeks have published research on the successful re-programming of microbes to unlock new materials. This could lead to a whole range of innovative products from new drugs to enhanced carbon-absorbing materials. Here were our own thoughts on new materials and speed to discovery from a few weeks ago:

“However, artificial intelligence(AI), probably the hottest investment theme outside cleantech right now, has just been used in conjunction with supercomputing to discover a brand new material which could reduce lithium usage by up to 70%……Microsoft and Pacific Northwest National Laboratory (PNNL) research teams whittled down 32 million potential material combinations to 18 promising molecular structures within a week. Incredibly, the whole discovery project took 9 months in a screening process that would typically have taken more than 20 years using traditional lab research methods. The new AI-derived material, simply called N2116, should prompt thought as to what’s possible in the world of medicine, agriculture, transport and construction”

One final thought which is not so much a theme but is a necessity for these themes to accelerate; our investors always ask “where’s the exit?”. The text book response is that investor exits usually happen through a trade sale(M&A), buy-out (Private equity) or listing shares on public markets via IPO. Private equity house, Bain Capital, reckon global M&A activity of $3.2 trillion was down 15% in 2023 to its lowest in a decade. Meanwhile, EY’s global IPO report indicated listing activity was down 33% in value terms compared to 2022, and Goldman Sachs said it was the worst IPO year since 2016. The good news is that many advisory teams in the investment banks are quietly confident of an uptick in IPO pipelines for 2024. Indeed, the expected New York listing of Chinese fast-fashion play, Shein (ask the kids!), with a $90 billion valuation will be an early test of lift-off. The big global themes will still play out but juicy sales and exits would definitely confirm things are really flying. Also, and more importantly, confidence spreading outside the “Magnificent 7” to smaller businesses would be very good news.


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