Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about themes that could lead to equity market tailwinds and opportunities with Morten Springborg, global thematic specialist at C WorldWide Asset Management. We talked about reshoring, growing liquidity in the private sector. And we started by asking how 2024 has shaped up for equity investors so far.

Morten Springborg (MS): Surprisingly positive, I would say, compared to where expectations were half a year ago. Gradually, markets have been pricing in a reduced likelihood of a broad-based recession, which would, of course, affect equity markets negatively. I think that one of the primary reasons for this is this continued large fiscal deficit spending that we’re seeing, not only in the U.S. but broadly across the world. That might be a negative on the books of public sectors. But it’s a big, big positive, at least in the short term, for the private sector. And that liquidity flows out into private companies and into the equity markets. Two years ago, the U.S. government was spending $300 billion a year on interest payments. Now it’s about $1 trillion. So that’s $700 billion more of interest payments to holders of U.S. government debt. That’s a huge bonanza. And that is being spent. And that can actually be a big explanation for why we have not seen the expected recession hitting the U.S. shores.

Other themes promising a tailwind for equities

MS: We are quite significantly exposed to the theme of reshoring — the movement of manufacturing capacities, primarily away from China towards other emerging markets or to the U.S. This reshoring theme is also one of the reasons why we have not so far seen a recession in the U.S. The manufacturing construction market in the U.S. is extremely hot. Companies want to diversify their supply chain risks, and move production closer to consumption. It’s primarily the U.S., but it is also countries like Vietnam, India and Mexico. So there are big, big swings in capital in the global economy and in the manufacturing economy. And that is, of course, something that is a boon to capital goods companies, like Siemens and Schneider, Keyence, Eaton and Rockwell. These could potentially be favoured by reshoring thematics that’s going to be ongoing for the couple of next decades.

The impact on currencies

MS: We live in a world where we are seeing a tremendous growth in debt, which will lead to a debasement of currencies. I think that is basically what is happening. The value of our fiat currencies — no matter whether it’s euros, or yen or USD — is deteriorating day by day. So you need to allocate your investments to areas that is not affected by the debasement of nominal assets like currencies. We have seen that gold has gone very high recently. We see commodities are starting to get alive again. And equities will be supported by this recognition amongst more and more investors, that your savings are not necessarily getting a real return if you stay in nominal assets.

And finally, what’s the bottom line for equity investing in 2024?

I would stress the importance of understanding what has happened to global equity markets from the continuous extremely strong bid from passive strategies. There has been a constant allocation of capital to indexed products over the last 10-15 years. That, I think, is going to be challenged at some point over the coming few years. Because the idea of ever-increasing allocations into passive strategies is built on the premise that employment markets continue to be strong. The moment that we start to see small reductions in the inflows into passive strategies, the repercussions for capital markets could be quite significant. So I also think that we are going to see more volatility in equity markets. And our strategy to survive that volatility is to stay in pockets of the equity markets where we see strong secular growth. Companies that are exposed to these pockets of growth, thematically supported stories, will see earnings growth. So we go for growth companies that are supported by thematics. And it could be thematics like we’ve talked about previously, but it could also be in emerging markets, which is now starting to see a new life, supported by many strong thematics there, like financial inclusion. If you take a look at Brazil, for example, approximately 50% of the population have no access to official banking. That is a strong growth driver for banking services and financial services in toto. Indonesia has 2% insurance premium to GDP penetration. That can go up five to 10 times over the coming decades and is a secular growth area. So there are so many uncorrelated pockets of growth around the world that we can allocate capital to. We have a tremendous amount of investment opportunities in an ever-changing world.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Morten Springborg of C WorldWide Asset Management. Visit us at investment executive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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