Inflation and geopolitics continue to cause uncertainty in global markets, however investors can still find pockets of opportunities from global trends including the energy transition and artificial intelligence, according to SG Hiscock & Company, and its fund manager partners EAM Investors and abrdn.

Chief investment officer at SG Hiscock & Company, Robert Hogg says that the outlook for inflation remains important and for investors that had already priced in a continued easing in inflation pressures, the February US consumer price index (CPI) report was disappointing.

“The recent rally in global share markets has been driven by expectations that global inflation pressures will progressively ease, giving central banks the opportunity to begin cutting interest rates, even as economic growth and company earnings remain relatively resilient. Any interruption to this “soft-landing” scenario could cause investor sentiment to sour.

“In Australia, the latest inflation report was a bit more market supportive than the US report and was encouraging for investors hoping for a near term rate reduction by the Reserve Bank of Australia (RBA).

“However, another key indicator for the RBA which was less supportive of these hopes is the continuing growth in wage rates.

“Much of the inflation pressures present in Australia are ‘home-grown’ and emanating from the services sector, for which wages are a very significant proportion of overall costs. In isolation this latest report does not give the RBA any reason to bring forward their rate cutting cycle.

“The key risk for investors who have been hoping for central bank rate cuts sooner rather than later is that the continued slow pace, and perhaps reversal, of easing inflation pressures causes central banks to postpone interest rate relief, with monetary officials assessing that the risks from cutting too early are less than the risks of cutting too late,” Mr Hogg says.

Hamish Tadgell, head of australian equities and portfolio manager at SG Hiscock & Company says that equity markets have become more skewed by macroeconomic events and policy leading to higher volatility, returns dispersion and sharper cycles, but sees tailwinds from the energy transition and AI.

“The energy transition and the shift to renewables remains a significant trend supported by Government policy and funding that is creating the right incentives for companies to invest.

“The demand for processing and storing big data is another trend experiencing a step change with the surge in AI adoption. This is driving an insatiable demand and build-out of digital infrastructure.”

Domestically, higher rates are driving a multi-speed economy. The saving grace has been employment which has remained resilient with corporates being able to pass on costs.

Coming out of reporting season, Mr Tadgell says that inflation and higher prices has seen  top line growth and margins proving resilient, helped by a greater focus on cost control.

“Consumer discretionary, tech and domestic cyclicals surprised the market given the expectations. The market gave the greenlight on companies achieving cashflow breakeven and proving they don’t need to come back to the capital well for more.

Mr Tadgell adds that the prospects of moderating inflation and falling interest rates has seen a strong rally in equities with valuations expanding faster than earnings.

“A better balance of growth and inflation should continue to see a widening in equity market participation. This is supportive for smaller companies and M&A activity.

“Lower interest rates could also further support higher valuations, but +-will we see cuts as expected, and will earnings growth take over as the driver of returns – those are questions yet to be answered,” he says.

Irene Goh, deputy global head of multi-asset & investment solutions at abrdn, agrees there is likely to be greater volatility in stock markets this year given greater geopolitical and economic risk, but there is a good opportunity for income generation to come from fixed income and listed alternatives.

“We are expecting a mild recession in late 2024 in the US which, coupled with elections in several countries this year and the ongoing conflicts in the Middle East and Ukraine, adds to global economic uncertainty.

“This economic uncertainly may bring greater volatility in equity markets as we move further into 2024, and we expect slowing growth, moderating inflation, and falling interest rates over the next 12 months.  

“For investors looking to offset volatility and diversify investment risk, as well as reap regular income, we believe investment-grade credit and listed alternatives are attractive as the outlook looks favourable.

“Investment grade bonds offer attractive spreads to enable investors to achieve much lower volatility than the equity market while still getting similar levels of income.

“In particular, we are investing more in Australian investment grade credit, with a preference for higher quality over high yielding corporate bonds.

“We’re building an overweight position in fixed income as there’s every reason to think that over the next 12 months, we’re going to see duration do well and interest rates finally fall,” says Ms Goh.

Listed alternatives also offer growth and income sources that are insensitive to typical economic cycles and equities and bonds, which Ms Goh suggests is a useful tool for diversification.

“Listed alternatives help generate stable income distributions at much lower volatility.

“For example, listed infrastructure such as renewable infrastructure offers attractive and reliable yields with links to inflation while some property investments such as student housing can offer attractive, reliable, and uncorrelated streams of income.

“Having meaningful allocation to list alternatives ensures our funds remain resilient amid market uncertainties,” she says.

Travis Prentice, CEO and portfolio manager at EAM Investors, says there continues to be opportunities in small caps arising from probable central bank decisions to pause or slow down rate increases.

“While small caps as an asset class have outperformed over the long-term, recent results compared to larger market caps have been disappointing, but there is reason to believe this could be changing as global central banks have either paused their rate hikes or at least slowed down the rate of increases.

“This dynamic, combined with still buoyant economic growth generally, can be supportive of a new cycle of strong small cap performance.”

Mr Prentice also see opportunities in global small caps arising from the growth and adoption of artificial intelligence.

“We’re also seeing strong, accelerating trends in everything levered to AI and believe there will be meaningful beneficiaries of the AI buildout in small cap companies globally, not just in the “Magnificent Seven”.

“Obviously, we see massive opportunities broadly within key enabling technology providers in the space, but also in general industrials that are key beneficiaries of the necessary build in infrastructure to support these large datacentres and compute loads that AI requires.

“From a country perspective, India is currently the standout, ascending to leadership status within emerging markets.”

Despite uncertainty in markets, Mr Prentice says adaptable strategies will be most successful.

“The most underrated characteristic of any successful investment strategy is adaptability.

“Given the level of change currently, it is nearly impossible to predict the future with any degree of certainty. Therefore, when selecting investment strategies, one should always pay attention to the level of flexibility inherent in any strategy. Rigidity is aligned with death.”

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