The emerging middle class underpins investment opportunities
Demographics are structural, visible, long-term megatrends with compelling opportunities for investors. We adopt a bottom-up, fundamental approach focused on quality and sustainability. We believe that the Fund is well-positioned to navigate what could remain an uncertain near-term backdrop in 2024.
What is the investment outlook for sustainable demographics in 2024, given the prevailing macro environment (slowing global growth, geopolitical, higher rates)?
Although global economic growth is likely to remain muted in 2024, inflation is coming down, and interest rates are nearing their peak in many economies. All this should support the Fund, given our focus on longer-duration growth. We are, however, operating in a very different regime to that seen in the years after the financial crisis. Inflation will likely remain stickier over the long term, interest rates will not return to zero, and geopolitics remains a tail risk for markets.
On top of this, the outlook for China remains a question mark. Given its heft in global markets, developments in the country will continue to exert a significant influence over market returns – with weakness in the country having the potential to touch companies across sectors, from global luxury goods businesses to industrial automation companies.
These risks underpin the attraction of having an element of defensiveness in portfolios, focusing on quality characteristics such as strong balance sheets and free cash flow generation, providing a measure of support in a more uncertain environment.
What comforts us is that we are exposed to companies driven by the strong structural growth trends of demographics, which are highly predictable and are less exposed to shorter-term macro concerns. In a weaker macroeconomic backdrop where geopolitical tensions persist, interest rates will potentially remain higher for longer, and the outlook for China is uncertain.
Companies that benefit from these trends appear even more attractive. Although we remain cautious, we think that the indiscriminate market moves of the past year have presented buying opportunities in many instances – with the demographic themes that drive these stocks remaining as powerful as ever.
What do you think could surprise markets in 2024, either positively or negatively?
The rapid oscillations in markets this year exemplify just how quickly sentiment can shift. The US Federal Reserve (Fed) and developments in China continue to drive markets, meaning that any continued dovishness from the Fed, or a stronger recovery in China, could act as a positive ‘surprise’ for markets.
It is not just about the Fed and China, however. In 2023, markets also ran up sharply in response to news surrounding artificial intelligence (AI)-related demand and the continued enthusiasm about the efficacy of obesity drugs. However, as bottom-up investors, we prefer not to spend too much time trying to predict or time the market. As a result, we will continue to focus on the three key demographic themes underpinning the strategy: ‘longer lives’, ‘better lives’, and ‘more lives’, and on identifying those companies that are best placed to benefit from them.
Within your portfolio, what has worked well in 2023?
2023 has been a year of two halves. The first part of the year was supportive for the Fund, as the market anticipated that interest rates would start to come down. At the same time, China’s economic reopening acted as a powerful tailwind. The third quarter of 2023 was less positive, as bond yields rose in a more risk-off environment, and the consumer recovery in China continued to disappoint.
Given the artificial intelligence (AI)-driven rally earlier in the year, some of the Fund’s strongest performers in 2023 have been the positions in the technology space. We continue to believe that companies such as Microsoft and Salesforce play a key role in driving the productivity improvements necessary in a world with a growing and ageing population.
In the consumer space, Airbnb also performed well as it benefited from a recovery in the leisure industry, while beauty company L’Oréal rallied significantly following China’s reopening and has continued to execute well despite cost-of-living pressures.
What themes, sectors or regions would offer opportunities and potential risks?
The healthcare sector offers an attractive combination of defensive growth and pricing power in an environment of heightened macroeconomic uncertainty. Although companies have faced a challenging operating environment over the past few years, we see opportunities across the medical technology, contract research, and managed care industries, where, in many cases, valuations are now very attractive and where companies remain supported by the demographic trend of increased life expectancy.
Sustainability considerations remain front of mind as the global population and its needs grow, making more sustainable use of the world’s finite resources paramount. As working age populations shrink and wage growth remains sticky, we see opportunities for companies in the factory automation industry that are helping to drive productivity improvements.
Middle-class expansion in emerging markets remains a key driver for the Fund. We are closely monitoring the pace of consumer recovery in China but think that the drivers of wealth creation in the country remain intact over the long term.
The emerging middle class underpins investment opportunities in countries beyond China, too, and we are particularly excited about the potential for Asian banks such as HDFC Bank and Bank Mandiri to benefit from the under-penetration of financial services in their respective markets, India, and Indonesia.
