That followed the release of an unexpectedly robust survey of purchasing managers in service sector companies, which added to concern that the Fed may still choose to raise rates further at its policy meeting on 20 September—despite falling inflation and signs of a cooling labor market.
While our base case is for no further hikes in this cycle, we expect economic uncertainty to keep equity markets volatile and range-bound in the coming months.
Amid the near-term swings, we advise investors not to neglect longer-term investment themes. At present, we see particular upside for the following secular trends:
Political support, technological innovation, and renewed interest in energy security all point to what we view as a major investment opportunity in the clean air and carbon reduction theme. Three technologies are driving growth and reshaping industries: 1) Wind and solar photovoltaic (PV) energy (with strong new installations) and associated battery storage; 2) battery-powered electric vehicles (in which we expect growth to be exponential rather than linear); and 3) low-carbon and disruptive energy technologies used in buildings (as industry and energy networks will lower energy demand directly at source).
The US passed the Inflation Reduction Act of 2022, which includes several spending initiatives that should help to accelerate the energy transition. The EU responded with the EU Green Deal Industrial Plan for the Net-Zero Age (GDIP), which also aims to accelerate investments to ensure the competitiveness of the European greentech industry.
Spending on education services is on the rise. Over the past 30 years, global tuition costs for higher education have steadily increased at a faster pace than global GDP growth. The expanding middle class in emerging markets means that more people have more disposable income. Members of this swelling middle class are seeking educational opportunities for themselves and their children to improve their prospects.
More recently, the introduction of generative AI initially posed headwinds for education services companies. But as ed-tech companies integrate AI into their own offerings, we believe these concerns will begin to dissipate for the companies leading the way on adopting AI. Furthermore, AI will likely accelerate the shift in skills desired by employers, adding to the case for lifelong learning and employee upskilling.
Return on equity in frontier markets has improved in recent years and now exceeds that of emerging markets, offering a better profitability outlook. Even though the MSCI Frontier Market index has a low correlation with oil prices, about 25% of the index (by market capitalization) are net oil exporters. Rebounding oil prices (as indicated by long-term prices in futures contracts) should benefit the net exporters in various ways, including higher growth both in the oil and in the non-oil sectors of the economy. Also, more stable or even pegged exchange rates versus the US dollar can add stability to investors’ returns during these volatile times.
Frontier markets account for around 5% of the world’s GDP, yet their equity market capitalization is only 0.4% of the global total. Given global investors’ low or nonexistent exposure to this small but growing part of the world economy, frontier market stocks are an opportunity for long-term investors, in our view.
So, we recommend investors keep a long-term focus while navigating near-term uncertainty. Investing in multiple themes can help mitigate risks.
Main contributors - Solita Marcelli, Mark Haefele, Alexander Stiehler, Christopher Swann, Vincent Heaney, Jon Gordon
Original report - Keeping a long-term focus amid volatility, 7 September 2023.