2024 Investment Outlooks
2023 was a year in which rising inflation and interest rates once again dominated the macros, while stock markets were led by a narrow group of mega-cap, US-headquartered technology stocks. This year is likely to at least start more positively, with global inflation rates falling and the Federal Reserve signalling the potential start of rate cuts this year. For a forward-looking view, read the collection of outlooks below to find out what Polar Capital’s autonomous investment teams believe will lead the macro and micro discussion as we move through 2024. Their views will be influenced by whether the strategy they run covers a single country, regional or global mandate, or a more specialist one such as technology, healthcare, financial or sustainable thematic equities.
Emerging Markets
Convertible Bonds
European Income
China
European Opportunities
Financials
Healthcare
Insurance
Japan
Smart Energy
Smart Mobility
Technology
UK
North America
Artificial Intelligence
Asia
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If 2023 was the year of corporate awareness and interest in artificial intelligence (AI), then we believe 2024 will be the year of broad corporate adoption. The first generative AI tools have been launched to much fanfare, with very strong feedback from early users. The AI stack continues to be rapidly built out and, while we see continued to see strong demand for the infrastructure layer, we are excited to see new developments in AI applications and deployments across more companies and use cases. It is this cross-sector focus on both the AI enablers and beneficiaries that differentiates the Strategy and has done so since launch. With the ability to invest across the full spectrum of the AI stack, we aim to capture opportunities that will emerge as AI is adopted across all sectors, bringing a new wave of both disruptive companies and disrupted incumbents. The Team believes that the worst of the macro headwinds, as they relate to growth equities, may be behind us, and we are excited about the opportunity for companies that are able to deliver underappreciated earnings growth and upgrades. The market may also broaden, whereupon the team’s depth of expertise and experience will stand them in good stead to find the next generation of AI winners across the market-cap spectrum, beyond the household AI names. For more information on how the portfolio is currently positioned to capture this broad opportunity, join Lead Portfolio Manager, Xuesong Zhao, in a live webcast on the 18th January.
The broadening adoption of AI, an era-defining technology
Polar Capital Global Technology Team December 2023
All opinions and estimates constitute the best judgement of Polar Capital as of the date hereof, but are subject to change without notice, and do not necessarily represent the views of Polar Capital. Polar Capital is not rendering legal or accounting advice through this material; viewers should contact their legal and accounting professionals for such information. This does not constitute a prospectus, offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instruments, which may be discussed in it. Past performance is not indicative of future results. A list of all recommendations made within the immediately preceding 12 months is available upon request. This is not a personal recommendation and you should consider whether you can rely upon any opinion or statement contained in this document without seeking further advice tailored for your own circumstances. This is only made available to professional clients and eligible counterparties. Shares in the strategy should only be purchased by professional investors. The law restricts distribution of this content in certain jurisdictions; therefore, persons into whose possession this content comes should inform themselves about and to observe, all applicable laws and regulations of any relevant jurisdiction.
Xuesong joined Polar Capital in May 2012. He is lead manager of the Polar Capital Artificial Intelligence strategy and a Portfolio Manager on the Polar Capital Global Technology strategy. Prior to joining Polar Capital, he spent four years working as an investment analyst within the emerging markets & Asia team at Aviva Investors, where he was responsible for the technology, media and telecom sectors. Prior to that, he worked as a quantitative analyst and risk manager for the emerging market debt team at Pictet Asset Management. He started his career as a financial engineer at Algorithmics, now owned by IBM, in 2005.
Xuesong Zhao, CFA Partner
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Nick joined Polar Capital in June 2019 as an analyst on the Polar Capital Global Technology Team. Prior to joining Polar Capital, Nick worked at Neptune Investment Management as the Assistant Fund Manager on the US Opportunities growth fund. Prior to that he worked in academia at the University of Oxford.
Nick Williams Analyst
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We maintain a constructive outlook for the Strategy and believe we are holding a portfolio of strong, high-quality companies that are very attractively priced relative to their longer-term fundamentals. We also believe many of our portfolio holdings have been hit unjustifiably hard by panic around the stickiness of inflation and geopolitics. We see things turning around significantly into 2024, with the US monetary cycle turning, and we expect rate cuts towards the middle of the year. As a result, we believe many emerging market countries have for an extended period been running restrictive monetary and fiscal policies and, as the US monetary cycle rolls over, we see significant scope for many emerging market economies to enter an easing cycle, which should be supportive for economic growth as well as a growing earnings cycle. We still believe such a scenario is mispriced for Asia. Furthermore, we also see a probability for the China/US easing geopolitical tension to ease as the economic realities for both start to hit home. This will likely force both political leaders to turn more firmly to the domestic agenda of economic growth which should, in turn, lead to a reduced risk premium in China. We see the narrative for China being one of a renewed exporter of goods to the world. We also see the emergence of a new, large investment cycle coming to the asset class that should, in our view, drive a strong earnings cycle as well. We believe de-dollarisation will be a big boost and the development of a so-called ‘multipolar’ world with more upside than downside as we feel that, as stock-pickers, we can take advantage of some of the fast-growing emerging trends. The underlying portfolio companies are well exposed to strong growth dynamics, are high quality and we believe they are mispriced so we have a strong outlook for 2024 for emerging markets and for the Strategy.
The fortunes of Asia look forward to the US monetary cycle turning more positive
Polar Capital Emerging Markets & Asia Team December 2023
Jorry joined Polar Capital in June 2018 to set up the Polar Capital emerging markets growth franchise. Prior to joining Polar Capital, Jorry worked at various firms including Nordea Investment Management, Danske Capital, F&C Investment Management, New Star Asset Management and BankInvest Asset Management.
Jorry Nøddekaer Portfolio Manager
Naomi Waistell Portfolio Manager
Naomi joined Polar Capital in August 2020 as a fund manager on the Polar Capital Emerging Market Stars strategy, launched in July 2018. From February 2010, she worked at Newton Investment Management where, since September 2014, she was an investment manager on the emerging markets and Asian equity team. Before this, she was an investment manager on their European and global equity teams. Naomi began her career as an associate at Praefinium Partners Investment Management in 2007 before moving to the financial consultancy arm of the Capita Group in 2009. Her specific area of interest and expertise is managing portfolios with an ESG focus.
Portfolio Manager
Naomi Waistell
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Chinese equities had a challenging time for much of 2023. Geopolitical tension, low consumer confidence and property woes all contributed. A negative feedback loop between weak consumer confidence and low business confidence led to low aggregate demand and piecemeal stimulus largely failed to rekindle animal spirits. Since October, we have started to see encouraging signs that this period of poor performance is likely coming to an end, with rising levels of stimulus, more pragmatic policymaking and stabilising geopolitical risk. On stimulus, we are encouraged to see a swift and decisive change in October, as the government moved to widen its budget deficit to support growth. A Keynesian-style stimulus is needed to boost short-term aggregate demand to kickstart the economic engine. On policymaking, the government has turned up its charm offensive on private enterprises to boost business confidence. While it will take time to translate encouraging rhetoric into sincere actions, this is a welcoming sign after a much less business-friendly environment over the past five years. On geopolitical tension and staying with a charm offensive, the icebreaking summit between Presidents Biden and Xi in November, and Xi’s more conciliatory dinner speech to the US business dignitaries, offer reassurance on the manageability of geopolitical risk. At an investment level, three themes stand out: a consumption recovery, the emergence of Chinese multinationals and advanced manufacturing. After a protracted period of underperformance, many of China’s most competitive, highly innovative and well-managed business franchises are trading at compelling valuations, many of which are emerging as truly global and successful multinationals. We are constructive on these high-quality structural growth companies heading into 2024.
High quality business franchises in China offer investors high growth potential at compelling valuations
Jerry joined Polar Capital in June 2018. Prior to joining Polar Capital, Jerry was the fund manager of the Nordea Chinese Equity Fund and prior to his tenure at Nordea, Jerry was an equity analyst at Generation Investment Management specialising in China. Jerry has also worked for BlackRock as a fundamental equity research analyst based in London and the US, specialising in the global consumer and technology sectors. Further to this, Jerry is a native speaker of Mandarin and fluent in English.
Jerry Wu Portfolio Manager
2023 market performance has been characterised by a very narrow equity rally led by seven technology stocks, whereas the fixed income markets can be characterised by rising rates from most central banks and the realisation that “rates will be higher for longer”. Neither characteristic has been easy for the broader market to digest and profit from. In trying to anticipate what 2024 will hold, a good starting point is to ask if 2023 will be repeated. We believe not, but the answer to a second question – will there be a recession in 2024? – is less obvious. That is where we believe convertibles can add value. Although equity valuations have retreated, especially away from the so-called ‘Magnificent Seven’, and there does appear to be pockets of value, we remain mindful of the potential for a turn in the business cycle due to the lagged effect of interest rates on economic and corporate performance. At the same time, if rates have now peaked, we can see the potential for a tailwind not a headwind from rates in the year ahead. We believe convertibles can benefit from both these factors, from attractive equity valuations and a rates tailwind, but, in the eventuality of a recession, we also believe convertibles will help protect capital. Finally, we believe 2024 will be a large refinancing year for debt capital markets, both straight debt and convertible debt. Moreover, we believe a number of high yield issuers will seek to refinance themselves via convertibles given the cost of capital in their home market. If this comes to fruition, it will provide a further tailwind to the asset class through a broadening and deepening of the opportunity set, and on terms that we anticipate will be very investor-friendly.
2024: Rates, refinancing and recession?
Polar Capital Global Convertible Team December 2023
David joined Polar Capital in October 2010 to establish the Global Convertibles team. David is an experienced convertible bond specialist, having spent 36 years in the asset class in both investment banking and investment management. Before joining Polar Capital in October 2010 to establish the Convertible team, he was joint CEO of Vicis Capital (UK) Ltd which he joined in 2006 to set up and manage the international convertible portfolio of the New York-based hedge fund. David started his career at Salomon Brothers International and moved to Baii (a subsidiary of BNP Paribas) in 1987, where he first started managing convertibles. He joined Schroders in 1996 and Citigroup in 2000 following the Citi takeover of Schroder Investment Bank.
David Keetley Portfolio Manager
Stephen McCormick Portfolio Manager
David Sugarman Portfolio Manager, Head of Credit and Convertible Research
Stephen joined Polar Capital in October 2010 and is co-manager of the Global Convertibles strategy. Prior to moving into convertible trading, Stephen was a research analyst at Tucker Anthony. In 1993 he became a partner in Forum Capital Markets, eventually joining Paine Webber in 1994 where he went on to manage their convertible department until 1998. He was a senior member of the convertible sales team at Morgan Stanley before establishing and managing Valmiki Capital Management in 2005. The following year, he moved to Moore Capital where he, as a member of a three-person team, managed a $1bn global long/short equity portfolio before joining Vicis Capital to manage the US convertible bond portfolio in 2008.
David joined Polar Capital in 2011 and is a Portfolio Manager on the Global Convertible and Global Absolute Return strategies as well as the Head of Convertible & Credit Research. David began his career at Barclays Capital in London where he set up and ran their US convertible bond proprietary trading book. In 2007 he moved to CQS, then a US$7bn multi-asset hedge fund, to co-run their US convertible bond positions before leaving to joining Polar Capital. David has also worked as an economic policy researcher for the United Nations and as an economic policy consultant for the US Environmental Protection Agency.
We maintain a constructive outlook for the Strategy and believe we are holding a portfolio of strong, high-quality companies that are very attractive priced relative to their longer-term fundamentals. We also believe many of our portfolio holdings have been hit unjustifiably hard by panic around the stickiness of inflation and geopolitics. We see things turning around significantly into 2024, with the US monetary cycle turning, and we expect rate cuts towards the middle of the year. As a result, we believe many emerging market countries have for an extended period been running restrictive monetary and fiscal policies and, as the US monetary cycle rolls over, we see significant scope for many emerging market economies to enter an easing cycle, which should be supportive for economic growth as well as a growing earnings cycle. We still believe such a scenario is mispriced for emerging markets. Furthermore, we also see a probability for the China/US easing geopolitical tension to ease as the economic realities for both start to hit home. This will likely force both political leaders to turn more firmly to the domestic agenda of economic growth which should in turn lead to a reduced risk premium in China. We see the narrative for China being one of a renewed exporter of goods to the world. We also see the emergence of a new large investment cycle coming to the asset class that should, in our view, drive a strong earnings cycle as well. We believe de-dollarisation will be a big boost and the development of a so-called ‘multipolar’ world with more upside than downside as we feel that, as stock-pickers, we can take advantages of some of the fast-growing emerging trends. The underlying portfolio companies are well exposed to strong growth dynamics, we believe are high quality and we also believe they are mispriced so we have a strong outlook for 2024 for emerging markets and for the strategy.
Emerging markets set to benefit from the rollover of the US monetary cycle
Jorry Nøddekaer Lead Portfolio Manager
Naomi Waistell Senior Portfolio Manager
Naomi joined Polar Capital in August 2020 as a portfolio manager on the Polar Capital Emerging Market Stars strategy, launched in July 2018. From February 2010, she worked at Newton Investment Management where, since September 2014, she was an investment manager on the emerging markets and Asian equity team. Before this, she was an investment manager on their European and global equity teams. Naomi began her career as an associate at Praefinium Partners Investment Management in 2007 before moving to the financial consultancy arm of the Capita Group in 2009. Her specific area of interest and expertise is managing portfolios with an ESG focus.
The European index has strong dividend characteristics. The European market has plenty of mature blue-chip businesses that offer some growth but can also generate enough cash to pay attractive dividends. There is no need to own very low-quality businesses to pick up good dividends. In trickier markets, dividends make up a greater proportion of the equities’ returns. The post-Covid dividend reset has seen many companies move to cash-return policies that combine still generous ordinary dividends with additional share buybacks. As a region, Europe has shown surprising resilience to both the Ukraine war fallout and the rapid ECB hiking cycle, following swiftly on from it also navigating the pandemic relatively well. After a decade of shocks, there are few excesses in the system. While we expect the ECB to cut rates at some point in 2024, we do not expect a return to negative rates which is a clear positive in our view. Within equities, positioning and sentiment remain weak, offering further downside support. We continue to see a need to consider both valuation and cyclical risks. We do not expect a return to ultra-low bond yields but do expect more downward pressure on overvalued equities after some respite in 2023. On the other hand, we expect the lags of previous rate hikes to play out in economies in 2024. Further softening macro data would increase the risks for deep value sectors. The weirdness of the post-Covid recovery continues to suggest an open mind is the best approach.
An open mind for defensive dividend plays in Europe
Polar Capital European ex-UK Income Team December 2023
Nick joined Polar Capital in September 2014 to set up the European Income team. Prior to this, he was with Threadneedle where he managed the Threadneedle European Fund and Pan European Equity Dividend Fund, both of which were top quartile performers since inception. Nick was also deputy fund manager of the Threadneedle European Select Fund. Previously, he was a sell-side analyst at Sanford Bernstein and a chartered accountant with Deloitte.
Nick Davis, CFA Portfolio Manager
Nick Davis Portfolio Manager
The 2020s have so far been a rollercoaster for many companies in Europe. The pandemic, economic reopening, supply-side disruption, inflation and the most rapid tightening in monetary policy for a generation, all in quick succession, have provided a highly volatile backdrop and made business planning an even more difficult challenge. In 2023, growth in Europe stagnated but the recession that many expected has not materialised. In this environment, it is hard to say for sure what the new normal is. 2024 may well be a noisy year – with countries accounting for over half the world’s population due to hold elections, including the US and UK, it will be the biggest election year in history. However, with inflation cooling and rates peaking, could 2024 actually be a more normal year? In recent months, the soft landing narrative has gained traction as rate expectations have fallen and growth expectations have stabilised. While rate forecasts are inherently volatile and it remains to be seen whether inflation continues on a glide path lower, the requisite level of monetary tightening for an inflation rate beginning with a two or a three is materially less than that beginning with a four or a five. The lags from the rate hikes of 2023 will continue to exert a drag in 2024 but the positive inflection in real wages should continue to support consumption overall. Furthermore, we see more signs that destocking, a persistent headwind in many sectors in 2023, may be starting to moderate and could swing into a modest tailwind in 2024. With a potential shift in the inflation and rates environment, we see attractive opportunities in European equities which, on just over 12x earnings, are still valued close to the lows over the past decade. European small and mid-caps, which have been the lightning rod for the multitude of concerns that have weighed on sentiment towards the region over the past two years, look especially compelling, trading at a larger discount to large-caps than in the depths of the global financial crisis.
Attractive opportunities in Europe from positive macros and near decade-low earnings
Polar Capital Melchior European Opportunities Team December 2023
David joined Dalton Strategic Partnership, which was acquired by Polar Capital in 2021, in 2005 and has managed the Melchior European Opportunities strategy since its launch in May 2010. Prior to this, he was an analyst on the Melchior European Absolute Return strategy and managed a long-only segregated account from 2008.
David Robinson Lead Portfolio Manager
We believe the setup for 2024 is looking increasingly constructive for the financials sector. Having underperformed in 2023, primarily due to concerns about the outlook for interest rates and growth, it should be a significant beneficiary if the anticipated slowdown is shallower than expected. If there is a soft economic landing, we would expect strong share price returns reflecting the sector’s cyclical characteristics and history of outperformance from market lows. Conversely, trading at close to historic relative lows against the wider equity market, we would argue it is already discounting a much weaker outlook for growth which should give some downside protection if the outlook deteriorates significantly. We are overweight banks as they remain at very depressed multiples, despite the improvement in earnings, as we believe they would be the biggest beneficiary of any change in sentiment. We continue to like the outlook for the insurance sector for its defensive characteristics as well as the tailwinds it is benefiting from. In particular, the reinsurance sector is seeing one of the hardest markets for reinsurance rates as well as benefiting from higher investment income. We see selective good value in other areas of the sector including payments and alternative asset managers. Financial bonds also continue to offer very attractive returns following the rise in bond yields over the past two years to levels last seen 10+ years ago.
Financials should benefit from a clearer outlook for both interest rates and economic growth
Polar Capital Global Financials Team December 2023
Nick joined Polar Capital in September 2010 following the acquisition of HIM Capital, and is Portfolio Manager on the Polar Capital Global Financials strategy. Prior to joining HIM Capital, Nick worked at New Star Asset Management. While there he managed the New Star Financial Opportunities Fund, a high-income financials fund investing in the equity and fixed-income securities of European financials companies, which outperformed its benchmark index in all six years that Nick managed it. Previously, Nick worked at Exeter Asset Management and Capel-Cure Myers.
Nick Brind Portfolio Manager
George Barrow Portfolio Manager
George joined Polar Capital in September 2010 and is a Portfolio Manager on the Polar Capital Global Financials strategy. He has over 10 years’ experience analysing Europe, Asia and emerging markets. Prior to joining Polar Capital, he was an analyst at HIM Capital from 2008 where he completed his IMC.
As we look forward to the next year, there is much to engage and excite us. The healthcare industry continues to be highly innovative, demand from consumers for products and services remains elevated and the sector is attractively valued. With regards to innovation, 2023 has witnessed significant breakthroughs in areas of high unmet medical need such as obesity, Alzheimer’s disease, oncology, and cardiovascular and respiratory disorders. Despite this impressive progress, there has been relentless downward pressure on many stocks, especially among small and mid-cap healthcare stocks including some in biotechnology. It is this move lower for valuations that has now created the opportunity to invest in the best people with the latest technologies to develop the next advances in medicine. In terms of demand, 2023 has seen a strong recovery in utilisation as more and more healthcare systems globally work through the post-Covid backlog of patients looking to access care. Importantly, that positive momentum is expected to continue for the next 2-3 years. Last, but not least, healthcare valuations are attractive, both on an absolute and relative basis, across the entire market-cap spectrum and globally, including in emerging markets. In conclusion, the healthcare sector is heavily out of favour but is attractively valued, is delivering high levels of innovation and has consistently shown the ability to deliver stronger revenue and earnings growth, regardless of the economic, political and regulatory environment. It is these characteristics that fuel our optimism for the year ahead.
Storms do not last forever
Polar Capital Global Healthcare Team December 2023
Gareth joined Polar Capital in 2007 to set up the Healthcare team. Prior to Polar Capital, Gareth worked at Framlington, where he began his career in investment management in 1999. Soon afterwards, he joined the Healthcare Team in 2001 and helped launch the Framlington Biotech Fund, which he managed from 2004 until his departure. Gareth studied biochemistry at Oxford, during which time he worked at Yamanouchi, a leading Japanese pharmaceutical company (later to become Astellas). As well as this, Gareth worked for the Oxford Business School and various academic laboratories including the Sir William Dunn School of Pathology and the Wolfson Institute for Biomedical Research.
Gareth Powell, CFA Head of Healthcare
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James Douglas, PhD Portfolio Manager
James joined Polar Capital in September 2015 and is a Portfolio Manager for the Healthcare team. Prior to joining Polar Capital, James worked in equity sales specialising in global healthcare at Morgan Stanley, RBS and HSBC. James also has equity research experience garnered from his time at UBS, where he worked as an analyst in the European pharmaceutical and biotechnology team. Before moving across to the financial sector, he worked as a consultant for EvaluatePharma.
25 in ‘23 and looking forward to a positive ‘24
Polar Capital Global Insurance Team December 2023
Nick joined Polar Capital in September 2010 and is Portfolio Manager of the Polar Capital Global Insurance strategy (previously the Hiscox Insurance Portfolio strategy). Nick has worked on the strategy since 2001 when he joined Hiscox plc. He participated in the management buyout of Hiscox Investment Management in 2007 when the business was renamed HIM Capital Ltd. He has developed a broad knowledge of the insurance sector during this time and from working for the chartered accountants, Mazars Neville Russell, where he specialised in audit and consultancy work for insurance companies and brokers.
Nick Martin Lead Portfolio Manager
In 2023, the strategy marked its 25th anniversary and its portfolio companies are on track to deliver an excellent year of performance. Looking ahead to 2024 we expect book-value growth, the long-term driver of stock performance, to be meaningfully higher than the c10% per annum historical average. Non-life insurers quickly benefit from rising bond yields given their liquid and conservative investment portfolios. Company investment income has increased materially in 2023 and should further accelerate into 2024. Combined with excellent underwriting profitability, current earnings power is the best we have seen for many years. After the sixth consecutive year of heightened catastrophe events, the reinsurance market had a hard reset at the 1 January 2023 renewals due to an ongoing demand/supply imbalance. Many capital providers reduced risk appetite at the same time as global inflationary pressure and rising catastrophe activity led to increased demand. Reinsurance pricing has risen substantially, particularly for catastrophe risk, with reinsurers materially increasing their retentions and moving them away from the risk. This strong reinsurance pricing is expected to be maintained in 2024 which will further underpin underwriting discipline in the primary insurance markets. Non-life insurance remains a defensive sector in an increasingly uncertain world. The positive outlook for investment income combined with continued robust underwriting markets means our companies’ earnings power continues to grow, which we believe is not properly recognised in company valuations given the derating the sector suffered in the first quarter this year. With expected mid/high-teen book-value growth and current valuations, we believe cash-on-cash returns are above 10%, materially higher than the c8% long-term average. We are very excited about our prospects as we start our second quarter-century.
Dominic Evans Portfolio Manager
Dominic joined Polar Capital as an investment analyst in October 2012 from KPMG and, since March 2022, is a Portfolio Manager on the Global Insurance strategy. Dominic previously worked as part of KPMG's insurance segment which he joined as a graduate trainee. At KPMG, he obtained broad experience working on a range of global insurance companies through roles within M&A and IPO due diligence, audit and markets. Prior to KPMG he worked for a year in corporate finance focusing on natural resource companies.
As we approach the end of the year, the consensus view on the global outlook for 2024 remains a soft landing/mild recession combined with lower interest rates as central banks declare victory in their war against inflation. In the case of Japan, the outlook for both the economy and stock market differs somewhat from the global picture with both monetary and fiscal policy still accommodative. Inflationary pressures have been evident in Japan over the past 12 months, but the Bank of Japan continues to wait for greater evidence of sustainable wage inflation before normalising monetary policy. Fiscal largesse remains the easy option for the ruling party for now, with Prime Minister Fumio Kishida’s low poll ratings leading to the announcement of yet another stimulus plan. Corporate profits are at record high levels as the benefits from economic reopening, an end to pandemic-related supply chain issues and the weak yen lead to a favourable operating environment for the majority of companies. In terms of the stock market, we remain very constructive on the outlook for Japanese equities given the significant acceleration in change within Japanese corporations as a consequence of the capital efficiency initiative from the Tokyo Stock Exchange. Our investment case assumes the strong performance of Japanese equity indices this year is the start of a multi-year re-rating process as capital allocation improvements across corporate Japan leads to a structurally higher level of return on equity. The greatest opportunity for large-scale capital efficiency improvement remains with smaller companies where the majority of management teams are still considering how to respond to the shifting landscape. Our portfolio remains well positioned to benefit from the structural changes occurring across corporate Japan.
Structural changes at a macro and micro level point towards a bright outlook for investors in Japan
Polar Capital Japan Value Team December 2023
Gerard joined Polar Capital in January 2005 and is Head of the Polar Capital Japan Team. He has been manager of the Polar Capital Japan Value strategy, formerly Japan Alpha strategy, since its launch in 2012. Prior to joining Polar Capital, Gerard worked in the Japanese equity team at Schroder Investment Management.
Gerard Cawley, CFA Portfolio Manager
Gerard Crawley, CFA Portfolio Manager
Chris Smith, CFA Co-manager
Chris Smith is Co-manager of the Japan Value strategy. He joined Polar Capital in January 2012 as a Japanese equity analyst, prior to which he gained five years’ experience working in accountancy. He holds a BSc (1st Class Hons) in applied accounting and is a chartered accountant and a CFA charter holder.
Concerns regarding inflation have eased somewhat in 2023. There have also been growing expectations of a soft landing in the US economy, a contrast to the beginning of the year when a relatively imminent recession was nearly universally expected. Inflation certainly seems to be a fading issue, at least for the time being. We also would not discount a soft landing. However, we would also find such an outcome to be remarkable given the starkly different interest rate environment consumers and companies are experiencing compared to recent years. American businesses continue to prove their resilience and we have been encouraged by the operational performance of the holdings in the Fund. We expect the portfolio to grow business value at a double-digit rate in 2023, a level of compounding it has experienced over the life of the strategy. Barring a recession, we would expect this to continue in 2024 and long into the future. This compounding of business value provides an attractive fundamental tailwind for investors. Despite stellar returns from the ‘Magnificent Seven’ and increasing influence on all market-cap-weighted indices which include them, it is important to realise there is far more to investing in America than this small group of exceptional mega-cap businesses. There are many highly attractive compounding opportunities lower down the market-cap spectrum. Moreover, such businesses are now on sale at multiples of cashflow we have not seen for a number of years. Our active and focused multi-cap approach aims to take advantage of this diverse opportunity set. Despite the strong fundamental progression of the portfolio this year, it has derated on a number of valuation metrics and, compared with the index (MSCI North America Net Total Return), on such measures is at its cheapest level ever. We believe this starting point and the compounding potential of the businesses held in the strategy provide reasons to be optimistic about future returns. The vast North American home market, the sheer number of high quality companies, a spirit of entrepreneurialism and a business-friendly environment are just some of the enduring and positive features of investing in American companies.
Reasons for optimism in the scale and quality of opportunities across North America
Polar Capital North America Team December 2023
Andrew started his career in 1997 at Baillie Gifford, before spending seven years at Threadneedle where he managed the Threadneedle American Fund. He left to set up Polar Capital's North American team in 2011.
Andrew Holliman, CFA Lead Portfolio Manger
Andrew Holliman, CFA Lead Portfolio Manager
Richard Wilson, CFA Co-Portfolio Manager
Colm Friel, CFA Portfolio Manager
Richard started his career in 1999 at Mercury Asset Management, before working at Threadneedle for nine years managing institutional mandates on the North American equities team. He left to set up Polar Capital's North American team in 2011.
Richard Wilson, CFA Co-Portfolio Manger
Colm joined Polar Capital in June 2014 working on the North American Equities team. Prior to joining Polar Capital, Colm spent over 3 years as a global equity analyst at Seven Pillars Capital Management. Before that, he worked as an Economist for the Bank of England where he was responsible for analysis of banks and banking systems.
Colm Friel, CFA Portfolio Manger
Acceleration towards clean energy solutions, an ongoing, long-term theme
Polar Capital Sustainable Thematic Equity Team December 2023
The clean energy sector has seen an eventful 2023, with increased interest rates driving up financing costs and impacting the spending behaviour of utilities and consumers. With financial conditions expected to ease as 2024 progresses, we anticipate a reacceleration of investment patterns which should be particularly pronounced in the second half of 2024. A more balanced supply/demand is leading to a much-needed resurgence of deflationary forces in clean power generation and storage solutions, serving as strong tailwinds to the electrification of industrial and consumer end markets. 2024 should see another year of record investments in energy storage as it offers a strong complement to distributed generation, especially in solar PV (photovoltaics). We also expect power semiconductors to continue to see strong demand as the strong underlying electrification trend in the global energy transition is very much intact. This could bode well for stocks entering next year as the current valuations appear to be very attractive on a mid- to long-term perspective. We therefore remain constructive on the underlying themes reflected in our investment strategy. Given the urge to accelerate the energy transition towards clean energy solutions and electrification, governments worldwide continue to explore the possibilities of reducing dependency on imported energy sources as well as fostering local manufacturing and power generation. As in the past, the strategy will continue to invest across the whole clean energy value chain, focusing on segments with strong structural growth drivers like clean power production, smart grid and storage solutions, the buildout of a green hydrogen infrastructure, power electronic components, electric vehicles, building efficiencies and the energy efficiency of Big Data.
Thiemo is Head of the Sustainable Thematic Equity Team and Senior Portfolio Manager of the Polar Capital Smart Energy and Smart Mobility strategies. Before joining Polar Capital in September 2021, Thiemo was the Head of Thematic Investing Energy/Mobility/Materials of Robeco Switzerland Ltd, Zurich, being the lead manager of the RobecoSAM Smart Energy and the Smart Mobility strategies.
Thiemo Lang Senior Portfolio Manager
Autonomous driving and EVs leading the way to decarbonisation through electrification
The strategy invests in companies enabling the decarbonisation, through electrification, and automation of global transportation sector. The growth in the automotive market in 2023 was again driven by electrification, with electric vehicles (EVs) showing a year-on-year (y/y) unit increase of 40%. This resulted in a worldwide EV market share of 19%, with the unit growth driven by China and followed by Europe. For 2024, we expect another growth year for EVs, with unit growth rates of 30% y/y. All regions should contribute to the growth next year, with the strongest unit growth likely driven by China, followed by the US and Europe. On the path towards autonomous driving, we project rising penetration of Level 2+ and Level 3 advanced driver assistance systems, the expansion of geofenced robo-taxi services into new metropolitan markets and further progress in training self-driving vehicles supported by the latest artificial intelligence (AI) technologies. In 2023, the world’s first AI supercomputer dedicated to solving the challenge of autonomous driving came into operation. The first commercial self-driving software solution trained by the AI supercomputer is expected to be rolled out in 2024. We are confident that next year will mark new milestones on the way to making autonomous driving a reality for millions of people. Overall, we remain very constructive on the strategy given the strong fundamentals of the smart mobility sector, with the entire transportation sector having engaged in an unprecedented transformation towards electrification. We will continue to invest across the entire smart mobility value chain, seeking exposure to market segments such as EV manufacturers and suppliers, power semiconductors, batteries, hydrogen and EV charging infrastructure, sensor and data processing technologies for automated driving, shared mobility solutions or new developments in the area of driverless mobility.
The age of AI has arrived
Recent progress in Artificial Intelligence (AI) represents a unique moment in the evolution of technology, perhaps dwarfing the impact of the internet and the smartphone. The Polar Capital Global Technology Team have been bullish on AI for many years and are one of the few with a long-term record investing here. AI will, in time, disrupt industries and potentially bring significant productivity gains. As such, the Team applies an ‘AI lens’ to the portfolio, such that all holdings are analysed against how AI is impacting their business model, competitive position and opportunity set. They have deliberately moved the portfolio to take advantage of AI and, heading into 2024, more than 80% of the portfolio is made up of companies they believe are AI enablers or beneficiaries. The Team also believes the worst of the macro headwinds, as they relate to the technology sector, are likely behind us and the investment backdrop for growth technology in particular looks appealing. The sector tends to outperform the broader market in times of low economic growth and stable interest rates. The robust growth of the portfolio, and scarcity of growth elsewhere, should drive superior returns. The technology sector should continue to deliver strong growth in 2024 as AI moves from infancy to more widespread adoption. The market may also broaden, whereupon the Team’s depth of expertise and experience will stand them in good stead to find small and mid-cap technology winners.
Ben joined Polar Capital in May 2003. He is lead manager on the Polar Capital Global Technology and Polar Capital Artificial Intelligence strategies. Prior to joining Polar Capital, Ben began his career in fund management at CMI, as a global technology analyst. He moved to Aberdeen Asset Managers in 1998 where he spent four years as a senior technology manager.
Ben Rogoff Partner
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Nick Evans Partner
Nick joined Polar Capital in September 2007. He was appointed Portfolio Manager of the Global Technology Strategy on 1 January 2008, and is also a Portfolio Manager on the Polar Capital Artificial Intelligence Strategy. Nick was previously head of technology at AXA Framlington where he was lead portfolio manager of the AXA Framlington Global Technology Fund and the AWF Framlington Global Technology Fund between August 2001 and July 2007. Both funds were rated five stars by S&P and received several S&P and Lipper performance awards. Nick graduated with a BSc (Hons) in Economics from University of Hull.
Ben joined Polar Capital in May 2003. He is lead manager on the Polar Capital Global Technology and Polar Capital Automation and Artificial Intelligence strategies. Prior to joining Polar Capital, Ben began his career in fund management at CMI, as a global technology analyst. He moved to Aberdeen Asset Managers in 1998 where he spent four years as a senior technology manager.
The UK has had a tumultuous few years economically, being an outlier on both inflation and growth. We believe this is set to change dramatically in 2024. We believe there is growing evidence that the perception of the UK’s structural inflation issue is overdone. The effect of the UK utility price cap sent UK inflation higher, and for longer, than its global peers but as this has flowed through, inflation is normalising towards the global pack and is set to fall below 3% in the Spring and remain there or thereabouts until the end of the year. This recoupling with the rest of the world suggests interest rates will follow a similar downward trajectory to other developed markets and paves the way for the first rate cut in 2024. The anticipation of a lower cost of capital should be transformational for the UK equity market, precipitating a rerating from its lowly 10x earnings. It should be particularly positive for small and mid-caps which have been hit hardest by the rising rate environment, having underperformed large-cap stocks by over 25% since rate rises began. The strategy is around 2/3 small and mid-cap. There is another change afoot in the UK economy too – namely growing evidence that the perception of the UK as the sick man of Europe is also overdone. The ONS has restated post-pandemic growth following an error, demonstrating that the UK is very much within the global pack on post-pandemic recovery. UK PMIs were higher than in Europe in November so, while growth is anaemic, it is certainly not the weakest. Following nearly two years in the red, the UK has surged into real income growth which is set to accelerate in 2024. This is at least a more positive backdrop for UK domestic companies to grow their returns on invested capital. It has been several years since the UK has seen a setting of improving returns on invested capital coupled with the anticipation of a falling cost of capital. There are headwinds to overcome – not least higher mortgage rates and the potential for higher unemployment – but, broadly speaking, the facts have changed and allocations should change accordingly.
Positively, past performance is no guide to future performance
Polar Capital UK Value Team December 2023
George joined Polar Capital in April 2017 to manage the Polar Capital UK Value strategy with Georgina Hamilton. Prior to this, George managed the CF Miton UK Value Opportunities Fund and the Miton Undervalued Assets Fund at Miton Group. Previously, George co-founded Matterley Asset Management in 2008 and was co-manager of the group’s Undervalued Assets Fund. Before founding Matterley, George was a Director of Equity Sales at Credit Suisse.
George Godber Portfolio Manager
Georgina Hamilton, CFA Portfolio Manager
Georgina joined Polar Capital in October 2016 to set up the UK Value Team. Prior to this, she was with Miton Group where she managed the CF Miton UK Value Opportunities Fund and the Miton Undervalued Assets Fund. Previously, Georgina was a lead analyst for the Undervalued Assets Fund at Matterley Asset Management. Georgina holds a double first in Biological Anthropology and Natural Sciences from Jesus College, Cambridge and is a CFA charterholder.