Forces of change: Tectonic shifts in opportunity - Perspectives 2024

In stark contrast to a year ago, the global community is progressing through the beginnings of a new long-term regime defined by several key pillars – the retrenching of liquidity, de-globalisation, US-China technological supremacy, and amplifying advancements in healthcare, to name some but not all.

In our latest edition of Perspectives, we examined the driving forces that we believe will underpin global opportunities and risks, as well as instability and tectonic shifts. As the world enters a period of rapid transformation, it is critical that we undertake a highly discerning and disciplined approach to the global investment landscape.

 

The decline of democracy

 

2024 marks a critical juncture in global geopolitics as elections in the US, India, and Indonesia hold strategic significance and effect enduring impact on financial markets. We anticipate greater market volatility, policy shifts which dictate corporate strategies, and differentiated federal budgets with a focus on defence spending. The geo-economic, soft alliance of Iran, North Korea, Russia, and China represents a distinctive force against the Western-led liberal trade regime, however, India’s emergence as a key figure in the Global South is crucial to regional stability in the Asia-Pacific. We believe the medium-term beneficiaries of a changing geopolitical landscape will be global defence and cybersecurity companies who will best positioned to leverage these tensions. Despite China’s rising geo-economic influence, it is crucial to acknowledge the structural weaknesses evident in its current economic model – an ageing demographic, a diminishing labour force, and low fertility rates which will collectively contribute to a population downturn from 1.4 billion to 1 billion by 2075, according to the United Nations. Yet, China’s structural challenges represents a significant opportunity for the rest of Asia, highlighting our thematic focus on localisation and regionalisation to identify areas of robust opportunities across healthcare, financial services, and consumption.

 

Rising global government debt

 

The three years that encapsulated the rise of humanity in addressing the COVID-19 pandemic was a grace period for rising global government debt levels. As we enter a new regime of higher cost capital and government yields, the single biggest driver of budget deficit is proving to be higher interest rates. With government debt serviceability requirements increasing, policymakers must remain unwavering over the next few years in their commitment to preserving debt sustainability. As such, we expect strong, upward pressure on long-term interest rates and a reduced capacity by governments to fund critical investment initiatives, thereby providing more opportunity for private capital to do so.

 

 

AI in healthcare

 

We believe that generative AI will be truly transformational in the healthcare industry, with widespread implications for therapeutics (drug development), technology-enabled procedures, and digital healthcare. According to NIH, it takes on average 10+ years for the lifecycle of a drug from discovery to market, at an average cost of more than US$2.5 billion today. The utilisation of generative AI will deliver a high return on investment on R&D spending and innovation over time as it can streamline research processes, improve the efficiency and accuracy of clinical data, and automate the authoring of clinical trial protocols. Turning to a high-profile example of generative AI, NVIDIA’s Gen-AI platform BioNeMo, which allows biotech companies to build and customise digital biology foundation models with proprietary data, is advancing into beta testing as of 2024. The combination of stable earnings for several healthcare sub-sectors, along with the healthy intra-sector equity diversification (due to the rotation of capital across sectors such as managed care, healthcare services, tools, and medical devices) is producing a robust backdrop for absolute return generation in the global US healthcare equity sector.

 

Global interest rate markets

 

With a material rise in yields and deposit rates over the last two years, Australia’s credit and economic growth will likely decelerate in the face of declining services-led inflation, whose drivers are not a function of interest rates. The foundational attributes are key to sustaining an attractive risk-adjusted running yield and total return beyond the short-term:

 

• Speed of change in markets.
• Interest rate equilibrium of circa 3% official cash rate over the medium-term.
• Yield enhancement over 3 years, not 6 months, to reduce re-investment risk.
• Higher bond market volatility in interest rates and credit markets.
• Opportunities outside of mainstream areas of corporate and financial bonds, such as securities and consumer loan pools with high single-digit return potential.

 

We believe that the ability to continue to extract attractive yields in Australian and global fixed income and credit markets will only be afforded to those with the foresight and preparedness to act.

 

Energy transition

 

The uneven progress with the global energy transition is a stark reminder that this transformation is a journey, and though it is not linear, significant progress is well underway. Australia is not alone in its challenging transition to renewable energy, as many countries face the phenomenon where an ailing grid network is jeopardising the rise of renewable energy production.  

 

• Global investment in energy transition hit a record US$1.8 trillion in 2023, climbing +17% from a year earlier.
• Global investment in energy grids rose to $310 billion in 2023, led by the US and China.

 

2024 and 2025: A watershed moment for intelligent capital

 

Years 2024 and 2025 will be a watershed moment for intelligent debt capital that can take advantage of the dislocations that are almost virtually in front of us. Almost US$1.3 trillion of US commercial real estate (CRE) debt comes due for repayment by the end of 2025, with many borrowers seeing their interest costs double after they refinance their matured loans, let alone lower loan-to-value ratios. Globally though, including Australia, many real estate owners will face the same conditions, as real estate assets have been capitalised at peak prices and with cheap debt in the old regime. Put simply, 2024 to 2025 is the year of refinancing. However, as Australia’s credit cycle matures, we expect continued opportunity in private credit markets over the next five years, with a shift to tailored corporate lending opportunities, away from standard solutions provided by traditional banks.

 

This article references Perspectives – an annual research publication on the global macroeconomic outlook. It is produced for clients of Westpac Private Bank’s Global Investment Services.

To learn more, contact your Private Banker.

 

About the author  

As Chief Investment Officer for Global Investment Services, George Toubia identifies themes in global markets that are empowered by structural drivers. He and his team source and select investment opportunities to leverage the beneficiaries of these themes before they become widely recognised. He is responsible for sharing insights and actionable investment ideas with wholesale and sophisticated clients of Westpac Private Bank.