12 March 2024

A Stock Picker’s Guide to 2024 Amid Divergent Growth Cycles

Rob Hinchliffe, CFA

Rob Hinchliffe, CFA

Portfolio Manager, Head of Global Sector Cluster Research

Kenneth Ruskin, CFA

Kenneth Ruskin, CFA

Director of Research and Head of Sustainable Investing – Global Equities

Michael Mark

Michael Mark

Research Analyst

A Stock Picker’s Guide to 2024 Amid Divergent Growth Cycles

The macro trends we’ve observed following the Covid pandemic signal that the era of synchronized global growth is over. A new regime has emerged, in which growth cycles vary significantly and unpredictably around the world.

Parts of the global economy that were once expected to drive global growth, such as China, have stalled. At the same time, markets that seemed on the verge of recession, like the US, have proved surprisingly resilient. Some regions just remain in the doldrums.

For equity investors who are selective and active, such disparity and potential mispricing create opportunities.

Industries adapt to a diverging world

The signals coming from various parts of the world are notably diverse. In the US, resilient consumers, a tight labor market, and moderating inflation have bolstered macro conditions, despite expectations of a slowdown as the lagged effects of restrictive monetary policy take hold.

In China, projections of an economic rebound originally earmarked for early 2023 keep getting pushed further out as investors contend with ongoing weakness in the property sector.

In Europe, meanwhile, the economic outlook appears incrementally weaker, with eurozone manufacturing purchasing managers’ index (PMI) declining since June 2021.1

Rising geopolitical tensions may further exacerbate these regional disparities. Roughly half the global population will head to the election polls in 2024, raising the odds for disruptive leadership shifts. At the same time, Europe and the Middle East find themselves in what could be drawn-out proxy wars.

Beneath these dynamics lie further differences between sectors and industries, driven in large part by significant variations in the pace and progress of post-Covid normalization across end markets.

Among other challenges is the need to unload inventory amid swollen backlogs, a challenge that started with the semiconductor industry and has since rolled into consumer goods, medical equipment, transportation, and logistics. Inventory-to-sales ratios have come down significantly in some industries, indicating the resolution of these issues. On the flip side, however, the de-stocking phase has yet to begin for others, such as automation and general industrial companies, including electricals, machinery, and miscellaneous durables. Many of these businesses faced production delays due to inadequate supplies of inputs like semiconductor chips.

As 2024 unfolds, we expect to see further de-stocking in some industries underlying wholesale trade, which could lead to lower-than-usual orders and sales, while the general availability of inventory could also put pressure on prices and margins. However, resolving supply chain issues could be a mixed blessing for companies that benefited from strong pricing when Covid-induced supply chain issues were triggering shortages.

At the same time, higher interest rates are intensifying the divergence in global trends. Certain industries feel the impact of higher borrowing costs more than others. These include industries behind big-ticket items like housing and autos, as well as inventory-heavy industries such as distributors, while those whose operations rely less on leverage will experience less of an impact.

Macroeconomic data reflects the growing gaps globally, but the trend is also evident at the company level.

For instance, one company – a major provider of rolling bearings and related technologies to original equipment manufacturers (OEMs) and industrial operations in virtually every major industry – reported varying states of end-market strength between regions and across industries (see Figure 1).

Figure 1: Organic Sales Growth for a Leading Bearing Manufacturer Shows Big Variations by Industry

A Stock Pickers Guide to 2024 Amid Divergent Growth Cycles-chart 01

Source: Company data as of 31 December 2023.

The upside of volatility

We have highlighted just a few examples of market dynamics that affect the performance of certain sectors.

Ultimately, the combined effect of various forces throughout 2024 could yield a stark disparity between winners and losers – which means it’s more important than ever for stock pickers to stay active and highly selective.

No longer are returns likely to be correlated across regions and industries, which provided a more favorable backdrop for passive investing. Desynchronized growth, as we are seeing now, should favor active investing.

In fact, the increased volatility arising from this market, economic, and geopolitical environment presents even more opportunities for active managers to find high-quality yet underappreciated stocks that can also benefit from cycle-agnostic, longer-term secular themes.

New alpha sources in a new future

One of the key longer-term themes for the coming years is a rise in capex related to near-shoring, partly as a result of the Covid-induced realignment of global supply chains. The push for companies to bring operations closer – both to home and to end consumers – has prompted a surge in US manufacturing spending since the pandemic. Beneficiaries of near-shoring include US-focused manufacturers as well as banks and consumer product companies in countries such as India and Mexico, which are benefiting from the supply chain shifts.

Factory automation is another area for investors to watch. Opportunities from this trend are vast and already on many companies’ radar, given the difficulties and higher cost of hiring labor. US industrial equipment and manufacturing plants, in particular, need significant automation upgrades following decades of underinvestment in manufacturing. Moreover, near-shoring itself requires more automation to ensure product costs don’t rise due to higher labor costs. Direct beneficiaries of this trend include IoT (Internet of Things) and machine-vision technology providers, which are enabling more automation and plant efficiency, along with industrial automation companies. Industrial software companies also stand to gain from this increased emphasis on automation and productivity.

Momentum behind green energy and net-zero spending is also providing a boost to companies that help clients meet carbon-reduction goals. In fact, an estimated US$30 trillion needs to be spent over the next 15 years to reach net zero by 2050 (see Figure 2). Segments set to benefit from this trend include manufacturers of heating/air conditioning products, mining and rail equipment, and electric vehicle batteries, among others. One of the newest entrants to our portfolio is a multinational industrial engineering group specializing in steam-based products, which are critical to the functioning of manufacturing plants. For example, industrial heat is responsible for roughly 20% of worldwide CO2 emissions, but 30% of industrial heat is now sourced from fuel-fired steam boilers that power the company’s steam solutions, which are increasingly used by their clients to reach net zero targets.2

Figure 2: Scale of Incremental Investment Required to Achieve Net Zero

A Stock Pickers Guide to 2024 Amid Divergent Growth Cycles-chart 02

Source: Making Mission Possible: Delivering a Net-Zero Economy, Energy Transmission Commission, Sep 2020

*H2 and/or CSS on thermal plants

Capitalizing on volatility and change

Though we may be seeing the end of synchronized global growth, the resulting volatility creates an investment landscape ripe with alpha opportunities.

The key is combining on-the-ground insights into local industries with strong fundamental analysis, supported by a finely tuned and forward-looking process to identify and isolate the mispricings that arise as companies evolve over time.

Not all companies will be well-positioned to benefit from overarching secular themes in a transforming world. At PineBridge, by staying focused on stock selection as our only alpha source, we believe we can more accurately evaluate a company and determine the likelihood of a stock outperforming the market’s expectations – both within the current cycle and relative to longer-term, cycle-agnostic trends.

1 Source: Bloomberg, as of 29 February 2024.

2 Source: Spirax-Sarco’s Investor Seminar, 29 June 2022. https://content.spiraxgroup.com/-/media/engineering/documents/results-and-agm-notices/2022/results/ets-investor-seminar-master-deck-final---web.ashx?rev=c4e45fcb4bc74f64b2ef2cb1fae1f289&hash=97634F064269BD014CE862A664C8FDCE


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