London South East 00:01
You are listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice so please do your own research.
Peter Higgins 00:18
Hello and welcome to this Investing Matters ensemble special podcast where I've asked several fund management and investment industry experts questions including the lessons they had from 2023 outlook for 2024, which stocks and sectors they are most positive about 2024 and much more.
The experts that replied to these questions from me were:- Annabel Brodie-Smith, Communications Director of the Association of Investment Companies. Stephen Yiu, the Lead Manager of Blue Whale Growth Fund, Edmund Shing, the Global Chief Investment Officer of BNP Paribas Wealth Management, Gervais Williams, Head of Equities of Premier Miton, Charlie Huggins, Head of Equities of the Wealth Club, and George O'Connor, the award-winning sell side equities analyst covering software and IT services.
So let's start with my very first question to the experts. What were your greatest investing takeaways and lessons from 2023.
First up is Edmund Shing.
Edmund Shing 01:33
I think there are three.
Firstly, you need to keep to your convictions when markets go against you in the short-term.
And this is something we saw in October, where I had been very positive on stocks all year long.
And that was certainly a challenge in October, but we held to our view, and thankfully, we were awarded with strong performance from stocks in November, December.
Secondly, we always hear a lot of noise about geopolitical events.
But in the end, the effect on financial markets tends to be a lot smaller than initially feared by investors.
So there's a lot of initial volatility, but the real medium and long-term impacts tend to be much smaller than you think.
And thirdly, take the time to identify compelling investment opportunities and be patient to wait for good entry points in those investments.
Peter Higgins 02:31
Next up is George O'Connor.
George O’Connor 02:32
Change is always happening.
Don’t get comfortable, always be curious.
Secondly, in the short-term, we always exaggerate the impact of new technology.
Gen AI the next point, thirdly, usage, lags hype, but sadly, valuation is in lockstep.
Peter Higgins 02:52
Here we have Annabel Brodie-Smith.
Annabelle Brodie-Smith 02:54
Well, I'm a long-term investor in diversified portfolio of investment trusts and like to look for contrarian opportunities, I like to invest in out of favor sectors and assets.
So I think my story for this year has been the resilience of technology.
It's one of the key lessons from me.
I didn't feel I had enough technology exposure, I felt this through the pandemic, when it was absolutely booming, clearly technologies, how we influences how we work influences how we live our life.
And 2022 was a really horrible year for technology, it was really out of favor.
So I thought that was the time to start investing in technology investment trusts, investment trusts with technology exposure, they were very out of favor.
And I've been investing throughout 2023 and it has worked very well on this occasion.
Indeed, clearly, I think we're all familiar with the Magnificent Seven and how they have driven the US market.
But we didn't know about the excitement of artificial intelligence and the absolute ascent of Nvidia.
And its act itself in the investment trust, a technology and technology innovation sector has done incredibly well this year is up 46%.
The big trusts in that sector are still trading on 11% discount, so there may be more to come.
And also you can look at global trust or exposure technology if you don't want to go for pure technology trust. So that one's worked well for me this year.
Peter Higgins 04:33
Here's Charlie Huggins.
Charlie Huggins 04:17
So if we wind the clock back to the start of 2023, we had very high inflation.
We had interest rates rising rapidly and I think if you ask most people what they thought would happen to the economy, they would have given you a pretty grim prognosis.
As it transpired, inflation has remained high, interest rates have risen rapidly, that the global economy has held up a lot better than many people would have expected.
So I think the main message I take away from that is don't try and predict what's going to happen to the economy and to the stock market and don't try and time markets because these things are always notoriously difficult to predict.
Peter Higgins 5:12
Here is Stephen Yiu.
Stephen Yiu 5:14
The biggest takeaway for us in 2023, was to back your high conviction names and being able to invest more when the valuation became attractive.
So at Blue Whale we ran a high conviction portfolio of around 30 companies.
And if I take you back to the journey in 2021, when we first invested in Nvidia, in June, its market cap was at around $500 billion.
Later on in that year and Nvidia’s market cap peaked at about $800 billion.
And of course, 2022 was a very bad year for Nvidia.
Its shares fell by more than 50%.
And its market cap trough and around $300 billion.
What we did last year was to invest more into the share and a more attractive valuation, because we didn't think the investment thesis was broken.
So we were backing Nvidia with our fundamental research.
Of course, throughout 2023, as some of you would have noticed, that Nvidia’s market cap is now backed above $1 trillion dollars with more outperformance to go from here.
So our learnings has always been to run a high conviction mandate and back your companies with conviction.
Peter Higgins 06:44
And finally Gervais Williams.
Gervais Williams 06:46
I think looking back to 2023, I was just surprised by the scale, at which this small cap effect can work in reverse.
If you look back to 2023, of course, it was a year when many AIM listed companies share prices fell at the AIM Index was down last year.
And yet on the other side, in the very largest companies, the mega caps, the US technology giants, they in aggregate, according to Bloomberg rose by 107%.
It's just truly extraordinary and when you look at that in the context of market volatility, which is a measure of the cost of instability or instability, at the moment, in spite of you know COVID, Ukrainian invasion, uncertainty about Gaza, effectively, market volatility had fallen to levels which were just as low as they were prior to all of those events, COVID, etc, and pandemic.
So, I just think that's been a truly exceptional year and I think we need to be aware of what's happened, but more importantly, be careful about the future.
Peter Higgins 07:53
Here’s my second question, how will you be applying those lessons in 2024?
The first respondent to my question is Edmund Shing.
Edmund Shing 08:03
Well, firstly, I'm staying positive on global stocks, despite all the obvious economic concerns that we see around the world.
Secondly, I'm keeping to my bull thesis on commodities, thinking about precious metals, uranium, and also oil.
And thirdly, focusing on picking out a very small watch list of high-quality small caps, in which there could be compelling entry points in the near-term, given the historic underperformance of mid and small caps over the last couple of years.
Peter Higgins 08:41
Followed by George O'Connor.
George O’Connor 08:09
So Gen AI blew away all of the tech themes in 2023.
So two things stand out for me.
Rather than seeing the other tech themes as being utterly ephemeral.
There is an opportunity in terms of demand side drivers in areas like IOT, data migration, unstructured database technologies to have a second wind in 2024 based on usage patterns.
In 2023, Investors deemed that Gen AI was the only play was Nvidia.
This is blatantly just not the case for 24, let's hope that they'll wider Gen AI ecosystem gets more investor mindshare herd mentality remains strong.
Peter Higgins 09:28
Next up is Annabel Brodie-Smith.
Annabel Brodie-Smith 09:31
Well, next year, I'm going to continue with my long-term diversified portfolio.
But again, I'm going to be looking for contrarian opportunities.
Now, I have my eye on a couple of sectors.
One of them is the biotechnology and healthcare sector.
It is currently trading on a 15% discount, it boomed through the pandemic, but it's had a really tough two years.
Now, I think the fundamentals are still there, you know, more than ever, we've got an aging population.
We've got innovation in terms of drug development, but also we've got monitoring of health issues at home technology that we can wear at home.
I think there are lots of opportunities.
On the downside, we have good year selection next year, so that might be some political instability.
But to me that looks like an interesting sector.
And again, we take a look at those companies and that sector very closely.
Another contrarian opportunity is the private equity sector that actually private equity sector had a good year this year was the best performing sector.
And that was really mainly driven by 3i which is a very big company 91 billion of assets and it's up 89% in the last 12 months, so phenomenal performance.
But if you look beyond 3i (III), there are some very good performing investment trusts in the private equity sector, some of them are up 20% or so, this year, they are trading on double digit discounts, or sometimes discounts in the 20s or either in the 30s. So I think that's really worth investigating further.
Peter Higgins 11:14
Next is Charlie Huggins.
Charlie Huggins 11:16
I think there are a wide range of economic possibilities into 2024.
The base case scenario, I suppose is that interest rates are cut in 2024, and the economy has a soft economic landing.
I describe that as a Goldilocks scenario where we avoid recession, that's one possibility.
Another possibility is inflation remains higher than expected, wages are still rising strongly, policy prices are unpredictable.
So that could well happen that inflation and interest rates stay higher for longer.
And of course, another potential scenario is the economy does weaken a lot more than expected.
So what am I doing to prepare for that?
Well, I'm trying to find companies with strong cash flows, strong balance sheets and strong business models that are able to weather a range of different economic scenarios.
Peter Higgins 12:12
Next is Gervais Williams.
Gervais Williams 12:14
Basically, I don't think we will change much.
I think the small cap effect will return.
I think, specifically, I think it's a case of being confident about what we're doing, adding value through picking out individual management teams who are well positioned to invest capital to generate some very attractive returns, companies, which are agile companies, which are able to generate surplus cash.
I think all of these are the ordinary things we should be doing.
And I don't think we should be greatly affected by what happened in 2023, even though was obviously difficult, because many of the funds doing the kind of things I've just said basically didn't do very well in 2023.
Peter Higgins 12:53
Some very, very interesting replies there, thank you all.
So a bull thesis on commodities, that could be interesting.
Nvida is not the only generative AI play in the ecosystem, love that, private equity sector, and some very good IT properties, investment trusts companies at very big discounts could be interesting.
And also stick to small caps, I think we should expect that from Gervais, small caps are always a very interesting play.
So could be very interesting 2024 for them.
Curious question three.
What one thing in your view, could have the biggest impact on both the UK and the global economy in 2024, good or bad?
First up is Edmund Shing.
Edmund Shing 13:49
I think there are two.
Firstly, inflation falling faster than expected.
And this is something we see around the world at the moment, which will, I think, allow central banks to cut rates and reduce long-term interest rates as well.
This is something we're seeing now, which would be positive for global economic growth.
Secondly, I think an unexpected shift in the Middle East conflict via an impact on the oil price could be the sort of more unexpected, big impact that we could see, potentially.
Peter Higgins 14:24
Next, we have George O'Connor.
George O’Connor 14:26
We have multiple elections.
In multiple jurisdictions, electioneering does impact the real economy and the cost of capital will investors roll funds correctly in cash into the market and into equities?
Whether it's institutional private equity, VC, or indeed on the Clapham omnibus is a big potential change agent for 2024 terms of others new listing rules in the UK, looking at tech, the operational impact of Gen AI use cases and economics for the tech economy.
There is so much drivers on margins, from the salary rates of change downs that we've seen through 2023.
But also if we remember the impact of the tech downsizing that we saw in Q4 22.
And indeed Q1 23.
Big drivers in there also the slippage in AI growth rates that we're seeing the slippage in the undisturbed premium on M&A transactions.
And have we all noticed how the rule of 40 components are changing, less emphasis on revenue growth, more on free cash margin, will that impact valuation?
Peter Higgins 15:48
Next we have Charlie Huggins.
Charlie Huggins 15:52
I think the biggest thing to watch heading into 2024 will be what impact to these higher interest rates have on the economy.
Normally, there's a lag effect of interest rates on the economy.
It takes time for higher interest rates to filter through into higher borrowing costs for consumers and businesses.
So that will be the key thing to watch in 2024.
Even if interest rates start coming down out is what impact will the higher interest rates that we've seen have on the economy, it's possible that we haven't seen the full economic pain as yet.
Peter Higgins 16:26
Next, we have Stephen Yiu.
Stephen Yiu 16:28
Our view on the economy is we are in a very challenging environment, and is very likely that either we go into a slowdown mode in chapter 24, if not a recession.
And of course, if you're comparing the likes of the US economy versus the UK economy, it looks to us that the US economy is a lot more robust.
So hence, is probably going to be a slowdown in the economy growth, rather than a recession.
However, if we are looking at the UK economy, with inflation, still at a fairly high level compared to the rest of the world, at the same time, that consumer spending seem to have been weakened on a bank of high level interest rate, we probably could expect UK could go into a mini recession in 2024, is important to note that while economy can go into a recession, that the stock market could behave quite differently, because ultimately, what you want to do as an investor is to invest into high-quality businesses, which they are able to transcend a recession, they will be able to grow their market share with pricing power with strengthening their competitive position.
And if they are net cash on their balance sheet, which means that the likelihood of them needing to raise more money or to refinance their debt at a higher level of interest rate is quite low.
So they would be the survivor.
And this is where you want to invest into.
So I would expect that if the global economy is going into a slowdown mode, slash a mini recession, then investing into high quality businesses would do quite well in 2024.
Peter Higgins 18:34
And finally, we have Gervais Williams.
Gervais Williams 18:37
I think the main thing I'm worried about is that the central banks lose control of the agenda.
Up to now they've done quite a good job of raising interest rates and, and being careful about capital, hopefully, stopping banks going bust or too many banks going bust, etc.
So I think they've had control the agenda.
I think if we did get, unfortunately, unemployment building up there to a global recession, if governments continue to overspend because they wanted to offset those effects.
If we did get long-term inflation, or even long-term deflation, then I think there's real opportunity for downside risks to coughs clients permanent loss capital.
That's one thing we've just got to be horribly attentive to.
So the one thing which I am worried about is that central banks will lose control of the agenda. They haven't at the moment, fingers crossed they don’t.
Peter Higgins 19:28
Some thoroughly insightful replies there.
Just as a recap, looking at inflation, possibly falling faster.
We of course, got multiple major elections around the globe, including the UK and across America.
And we could have a very, very challenging environment, of course, potentially weakened consumer spending and a possible mini recession in the UK.
I just love what Gervais just said there, central banks could lose control. Very, very interesting. Let's see what opportunities 2024 throws up for all US investors.
Peter Higgins 20:10
There is my fourth question, what is your investing outlook for 2024?
This first reply is from Edmund Shing.
Edmund Shing 20:20
What is your investing outlook for 2024?
Well, generally, I'm remaining constructive, so positive on stocks, I would buy corporate bonds on pullbacks and I'm still long commodities and in particular precious metals and uranium to a lesser extent.
Peter Higgins 20:37
Next up is George O'Connor.
George O’Connor 20:39
I've been generally cautious on tech following the post COVID bounce and that has dissipated.
Now the economics and outlook are generally more favorable.
Unlike prior years, valuation is not a headwind. It's supportive.
However, shares got cheap through 23, we are reminded that cheap alone isn't enough to support investment cases with tech we're also looking forward in sentiment.
But we see a global improving macro are for longer, yes, but coming down that will positively impacts sentiment.
Peter Higgins 21:18
Here we have a reply from Charlie Huggins.
Charlie Huggins 21:21
I don't really have an outlook for 2024 because my investment processes focused on long-term business fundamentals.
So I'm less concerned about what a business will do over the next five to 10 months, I'm much more concerned about where the profits and cash flows will be in five to 10 years.
So my approach heading into 2024 is the same as always, which is to look past short-term economic headlines and focus on long-term business prospects.
Peter Higgins 21:48
Next up is Stephen Yiu.
Stephen Yiu 21:50
Our view on the global economy is we are in a new regime, the base case scenario is that inflation is coming down.
But it's going to settle down at a higher level than the proof cycle pre pandemic.
So instead of a 2%, inflation for the next three years, on average, is likely to be three to 4%.
In some developed markets, on the back of that, interest rate is going to stay higher for longer, of course, we probably could expect interest rate is going to come down from here from over 5%.
But the likelihood of interest rate coming back down to 2%, anytime soon, is quite low.
So interest rate could stay at over 4% for an extended period of time, which is bad for the general economy.
The last thing which is very important, if you follow a lot of the headlines that's going through now is we would expect geopolitical uncertainties to continue in the near future.
What we have already seen so far is the conflict in Ukraine, followed by the Middle East fighting.
And then recently, we also have certain activities in the Red Sea.
And of course, all these would feel into inflation that our price is going to be at a higher level than before.
So what you do want to do as an investor is either you invest into companies that could continue to sell more of their products or services, irrespective of all these macro uncertainties.
And within the Blue Whale Fund, artificial intelligence through Nvidia, Microsoft and Adobe could perform such a role.
On the other hand, we also would expect some companies or sectors that could benefit from some of these uncertainties would do equally well.
So within the portfolio, we have Lam Research, which they sell mission critical equipments into foundries.
And as some of us would know this, that we are trying to de-risk from Taiwan, we're replicating the capability to produce semiconductors in the Western world. And we would have seen foundry activities already started in Germany, in France and in the US as well.
So Lam Research, they are going to sell many more authentic equipments to these foundries in the next couple of years compared to before.
Secondly, as inflation is going to remain at a high level through MasterCard or Visa would charge us a commission on our nominal spending, they are going to see a tailwind in terms of the inflation on the back of the profit that they make.
So instead of a 2% inflation for throughout a 10-year period, until pandemic, they are likely to see a range of three to 4%.
So it's going to help those company to make more money on top of the digital transformation within the payment space that is still going on.
Last but not least, Canadian Natural Resources, which is the only energy company we have in the fund that we would expect all price to remain at a high level, despite a recession or slowdown might yet to come.
This is purely on a back of geopolitical uncertainties.
And you can already see that the oil price has been well supported at a high level then previous cycle.
So this is why the Blue Whale Fund is in position.
Peter Higgins 25:56
And finally we have a reply from Gervais Williams.
Gervais Williams 25:58
Well, as I mentioned earlier, the feature of last year 2023 was the market volatility came down to very low levels.
Risk didn't seem that high at the time, people were being paid for taking risk.
We saw exceptional returns from some of the very largest quoted companies.
And I think that kind of feature is going to be not going to be a feature of the current year.
Specifically, I think there'll be more events, more surprises. I think the electorate specifically will vote against the status quo.
And I think that's going to be really uncomfortable and inject extra instability. So like volatility will cost money. I think companies will run out of cash.
I think it's going to be a pretty tough time, I think, unfortunately, will be a global recession. And I think there will be unemployment.
I don't know that but that's my investment outlook.
Clearly companies which are generating surplus cash companies which are able to not just hold on to customers but actually continue to invest and expand into those areas which are vacated by companies going bust expand by acquiring companies, which have been taken over often at distressed valuations from the receiver.
Without the debt. I think we'll be not just survivors, but thrivers.
But I think they're not very many of them and we've got to pick them out.
Peter Higgins 27:11
Again, some very interesting responses there.
I like the fact that Edmund’s actually appears very cautious there.
And he's saying buy bonds on a pullback and long on precious metals.
George, he's saying be cautious because cheap alone isn't enough.
Stephen was saying interest rates may stay higher as higher rates for longer.
I think that's a very interesting response.
And of course, we've got to be on the lookout for further geopolitical uncertainties that's Gervais’s response as well.
Excellent, again, still opportunities for resilient companies, which is very much what Charlie was saying, as well, and have a very, very long-term outlook, looking for fundamentals over five to 10 years.
And sticking to his approach there.
Thank you all for those replies.
Now we have question five, which stocks or sectors are you least interested in, would avoid as we head into 2024?
First up is Edmund Shing.
Edmund Shing 28:22
Well, I think that the obvious candidate here is a US mega cap technology.
So, the Magnificent Seven companies such as of course, Meta, Apple and Amazon, these, the ones I think, could come under increased scrutiny from regulators in 2024. And could also see more challenging sales outlook in 2024.
So a lot of very good news is already priced into these Magnificent Seven stocks, I think times could be a little bit harder, and that we may exit a little bit of a bubble that we see around these Magnificent Seven stocks at the moment.
Peter Higgins 28:59
Second, we have George O'Connor.
George O’Connor 29:00
Firstly, got to be cautious on the first crop of IPOs, who have been biding their time in 2023.
We haven't kept payments that some techs have dreadful, a real revenue visibility, others are similar.
Secondly, public sector IT spend falters around election period.
This is exaggerated, of course, when there is a change of regime.
Remember the Conservative Liberal coalition government 2010?
Well, the first thing they did was to revise terms and conditions on suppliers.
And finally, remember with any new tech cycles, existing incumbent tech is instantly legacy. Certain companies are legacy, and structurally just less attractive.
Peter Higgins 29:52
Next, we have Charlie Huggins.
Charlie Huggins 29:54
I'm still very wary of companies with lots of leverage or debt heading into 2024.
I think even if interest rates are going to be cut, they're still going to be higher than what we've been used to for the last decade.
And I don't see interest rates going back towards zero anytime soon.
So I'm avoiding those highly leveraged sectors like banks, real estate, utilities, telecoms, I'm focused very much on balance sheet strength in 2024.
Peter Higgins 30:25
Next, we have Gervais Williams.
Gervais Williams 30:27
I think, basically debt, I think debts a problem if you've got too much debt, and you find that actually, you come under margin pressure, not only if you've got extra interest payments to be made, but if you've got to actually repay the debt, the bank in due course, but most particularly, you can't invest in your business.
And I think debt is a kind of poison in this scenario.
I think generally any business, which is actually losing money or got negative cash flow, I think is really vulnerable in this period.
I think if you get that in combination with a margin, squeeze or profit margin squeeze, and particularly if you come from an elevated valuation, you know, I think there's plenty of things to avoid there.
As I say, I think there's a real risk, not just in 2024, but in the last few years of losing permanent capital companies which have gone bust, etc. And I think we've got to be extremely cautious about taking too much risk.
Peter Higgins 31:21
Thank you for those replies, very interested to hear what Edmund had to say there.
And with regards to the Magnificent Seven tech stocks, which have absolutely been on a tear in 2023.
So I think rightfully there might be some caution there required.
And if those of you have made lots and lots of money regarding any of those tech seven stocks, maybe it's nothing wrong with taking a little bit off the table.
George, I liked what George was saying there about being cautious about the first crop of IPOs.
That may come to the market in 2024.
Because as we've seen in previous years, that doesn't always bode well for the investor, especially those retail investors buying from private equity entities.
Also, Charlie was making points there regarding being wary of leveraged or highly leveraged companies and those sectors in particular being banks real estate and telecom.
I think that's very wise words indeed.
Essentially Gervais was echoing those sorts of terms as well.
And basically saying that debt and highly geared companies, companies who just should be wary of, as we've always say, always do the research and how much cash the company has got, because you never know when they're going to have to come back to the market to get more cash.
Great replies there. Thank you all.
Now we have our sixth question, which stocks or sectors do you favor? And are overweight in as we head into 2024?
Our first reply is from Edmund Shing.
Edmund Shing 33:00
Well, as I said, I like commodities, I have a long-term bull thesis on the shortage of commodities around the world.
So shortages, potentially, of clearly uranium, potentially of oil, and also potentially growing shortages of silver, and copper.
So these areas I think, are very interesting.
And therefore commodity related sectors could also be very interesting, including energy of precious metals, as well as in the stock market banks, and also luxury goods, which have been somewhat under pressure in the latter part of 2023.
Peter Higgins 33:41
So our next reply is from George O'Connor.
George O’Connor 33:44
The sector is still fragile, let's not get carried away.
So I want to lean into proven compounders I'm reminded of that period post dotcom.
So looking at just 2003 onwards, then we used to speak about the elite, a small group of companies that were growing international paying dividends, expanding into adjacencies.
The best example then was probably Aveva, which you may recall the only one left is Computacenter (CCC), a trade handsome, 2024 marks another year. So we've got 19 of unbroken EPS growth, what's not to like?
Peter Higgins 34:26
Our next reply is from Annabel Brodie-Smith.
Annabel Brodie-Smith 34:29
Well this year, I think I'm looking at interest rate sensitive sectors, renewable energy infrastructure, I think is very interesting, it could not be more out of favor, it has gone from trading at premiums to changing at discount, it's currently trading at the 17% discount. It has a 7% yield.
So an attractive yield.
But what's happened this year, is that investors have looked at the bond market and they've sold out of this renewable energy trust and bought bonds instead.
Now, obviously, with some interest rate cuts on the horizon.
Now, in fact, discount has narrowed since the end of October, just on the prospects of potential interest rate cuts is now from 26% to 17%.
And in addition to those investors, favoring bonds, there's been some unhelpful investment trust regulation in terms of charges on the sector.
But, you know, obviously, looking forward, it might not be next year, but in the long-term, I think the yield on the sector will look more attractive, because the rates go down.
And also, I think the lessons from Ukraine needs to be more energy self-sufficient, we need to address global warming.
So that's why I think the renewable energy infrastructure sectors interesting.
My other one is property, it's very interest rate sensitive.
There's lots of M&A and deals being done in the investment trust property sectors in the REIT sectors, which has been helpful to shareholders in those companies.
They are on an average of 17% discounts, quite wide discounts, and some of them on 20s and 30s.
So a lot of yields may if there's a recession, clearly, it's not going to help for the property sectors.
But they came through the pandemic and the whole economy shut down.
So I think that could again be one to watch next year, but you know, it's good to buy cheap now and hold wait for improvement.
Peter Higgins 36:38
Here we have reply from Charlie Huggins.
Charlie Huggins 36:41
I'm looking for businesses that are as much as possible in charge of their own destiny.
And one business which I own in the quality shares portfolio is RELX (REL), which I believe is well positioned for in a variety of economic environments.
And that is because RELX it provides data and analytics to lawyers, and to insurers and to governments.
And the functions that it performs are critical to its customers.
So things like anti-money laundering, cheques, fraud cheques, pricing of insurance risks, these things tend to be in demand in good economic times and bad if you add that to the fact that RELX has a large number of long-term contracts, and most of its revenue is repeats or recurring in nature. I think it gives business a lot of protection from the economic environment.
And then you add that to the fact that AI, Artificial Intelligence could open up opportunities for RELX.
Given its industry leading datasets and its strong customer relationships, AI could help to accelerate and business's growth into 2024.
Peter Higgins 37:47
Our next reply is from Stephen Yiu.
Stephen Yiu 37:49
One of the biggest exposure within the Blue Whale fund is artificial intelligence, we have invested into the likes of Nvidia, Microsoft, and Adobe this year in 2023 those company has done very well for us.
But we would also expect the trend to continue into 2024.
Because what we have seen so far is we are at the very early innings of the development and adoption of artificial intelligence.
And if I give you some numbers, you might appreciate where we might be heading from here.
So globally, there are about 1 billion knowledge workers, including us sitting here.
And then of course, people work also working in the Far East such as in a call center or in some back office operation. If you assume on average, people get paid above $20,000 a year, so we would be getting paid a lot more in the Western world.
And people in the Far East would get paid less or less, say $20,000 across the 1 billion knowledge workers.
The numbers has been quoted recently is artificial intelligence is going to generate over $1 trillion of opportunities. And of course, that number could even be bigger than that.
But how do we justify this number? Or how does this number come about is quite easy.
In order to justify $1 trillion of opportunities, either, we can reduce the global knowledge worker headcount by 5%, which is 15 million people.
And if you do the maths, multiplying 50 million people, by $20,000, you get to $1 trillion of savings.
Of course, this is quite a, this is one way of doing that. The other way to think about this is if we can utilise artificial intelligence to deliver more value, then we can increase productivity by 5%, which equally would get you to a $1 trillion of opportunities.
Of course, the bigger question is, where do we go from there, our thesis has been that the penetration and the application are yet to be started. I mean, we have only started in the last couple of months or quarters, that this is going to be a lot more long-lasting than anything that we have seen before.
Hence, we would expect the opportunity set within artificial intelligence would continue not only into 2024, but equally would be much further ahead in the next couple of years.
So we remain to have a big investment in both Microsoft and Nvidia, we'll see the Blue Whale Growth Fund.
Peter Higgins 41:05
Our final reply is from Gervais Williams.
Gervais Williams 41:08
Specifically, we've just have a huge focus on companies which actually can hold on to sales, there may be a pullback, there may be recession, demand may fall.
But as if you can hold on to your sales and these essentials, is that you can hold on to sales because you've got outstanding customer service.
And that means that customers don't leave you they carry on staying with you.
If you can actually be a business where you invested for many years, and now you're maturing and you're coming into a period where your cash returns on that previous investment are going to be very substantial and you're outpacing the competition, then obviously, these are kind of features which tend to hold up during uncertain periods.
As I kind of mentioned, it's going to be a tough period.
Incidentally, one of the areas which is probably counterintuitive is often capital intensive businesses might actually have the advantage. If you think of businesses which they build properties.
For example, if you built a property five years ago, it would have cost you a certain amount of money, if you built it now it's going to cost you 40% more with inflation.
On top of that, even if you build the property, you need to generate a cash surplus. And that's after interest charges and everything else. So you'll probably need to get a higher return than you would have perhaps five years ago.
So companies which have already built properties and which aren't highly geared, may actually find that actually it can get rental increases to a much greater extent.
And indeed, they won't be building many properties until returns on their current properties move up considerably.
So you may find that capital intensive businesses that really describes the UK market, I think UK market will outperform will be actually one of the best places to be and I think small companies in capital intensive industry is not just talking about property here.
I'm talking about some of the financials, capital intensive financials, some of those in the mining sector, some of the energy sector, all sorts of interest, defense, all these areas, I think could generate some very, very attractive returns even in a very unsettled market.
Peter Higgins 42:56
Some great replies there.
One sector that's been gaining a little bit of momentum of the past six months was spoken about there by Edmund Shing that of the uranium sector and get some exposure on the UK market and overseas for that sector, obviously, we've got an energy issue ongoing in the UK, so that could be in play regarding energy issues that we may or may not have in 2024.
I like the fact that Annabel is sticking to her knitting there embrace the fact of interest rate sensitive sectors being possibly a good long-term play, because the renewable sector as we know have been under the cosh since 2023.
So maybe they'll have a good year in 2024 If interest rates keep falling, and also potentially more M&A in the property sector, notably, property investment trusts, and property REITs.
Also touched on potentially direct companies there, and a couple that were mentioned, just to recall, were Computacenter, RELX, Nvidia, Adobe, and Microsoft.
And Gervais obviously said there at the end as well, we should be focusing on companies that can hold on to sales and are resilient.
So yeah, always be looking out for some value and companies are adaptable as well.
Great replies. Thank you all. Then here is our final question to our ensemble podcast guests. Where do you see the FTSE 100 closing on December 31 2024?
Our first reply is from Edmund Shing.
Edmund Shing 44:48
This is a question I traditionally hate giving arbitrary index targets one year out is a mug’s game.
But if we're going to play this mug's game, then I would say that the FTSE 100, which has underperformed other global stock markets through 2023 is probably due a catch up.
It's still very cheap, and has quite a high commodity related content, as particularly oil and gas as well as mining.
So I would say if I look at where we are about 7,600-7,700 I think that the FTSE should be something just over 8,000 by the end of this year.
Peter Higgins 45:27
Oh, what a fantastic reply that is Edmund, thank you ever so much.
It is indeed a mug’s game. Thank you, sir.
Our next reply is from George O’Connor.
George O’Connor 45:38
8,025. Pete, thank you. Happy New Year to you. Take care.
Peter Higgins 45:48
Thank you George for that reply. Our next reply is from Annabel Brodie-Smith.
Annabel Brodie-Smith 45:53
When anyone asked me for a forecast, I always remember the great economist JK Galbraith’s quote.
'There are two kinds of forecasters: those who don't know, and those who don't know they don't know.'
Now. I'm in the first camp. I don't know.
So in the spirits, I'm going to say 8,300 and wish you all a happy 2024 and lot's of luck with your investing.
Peter Higgins 46:22
Annabel thank you for that. Fantastic quote. Really, really appreciate it. Thank you very much.
Our next guest replying to the final question is Charlie Huggins.
Charlie Huggins 46:33
Your guess is as good as mine, I genuinely have no clue whatsoever.
Pete Higgins 46:38
Charlie thank you for that reply, it is indeed a situation where your guess is as good as mine.
Thank you all for your responses to those seven questions that I posed to you, it’s been an absolute joy to have you on this ensemble podcast. I’m now going to designate you as all as my 'Magnificent Six'.
So on behalf of London South East, I’d like to thank you all for being my Investing Matters’ guests, a very big thank you to participating in this special ensemble podcast and to all our global audience, we hope you enjoyed it and it gives you some insights for 2024.
Please subscribe to the platform you are on and we are very much looking forward to hearing your feedback.
Until next time, take care and God bless you all.
