By Graham Campbell

It is always a temptation to meet with economists and strategists to hear their predictions for the year ahead. It is usually an interesting way to pass an hour, but after 40 years in the industry it is an offer that I always decline. Maybe I am sceptical about their ability to make predictions with any accuracy. Over time I have also come to realise that it would not pay to change my portfolio, even if I knew they had perfect short-term foresight.

When I was at university, a long time ago, I was told that equity markets lead economics by around 12-18 months. If so, it suggests we are generally wasting our time thinking about what will happen in 2024. The earnings of a single year can easily be shown to make up a tiny proportion of the value of a firm today. As can be seen in the semiconductor industry, share prices are ignoring current results and trading on expectations for 2025, 2026 and beyond.

Therefore, timing is the one skill that forecasters claim to have mastered, but also the one I am confident is a) most useless and b) the one I am most confident they do not possess. The allure of timing? It encourages activity. I remember many years ago asking an analyst his recommendations for a certain sector. He replied: “My recommendations remain, as always, trade vigorously.”

What ends up far more worthwhile is spending time on finding high quality businesses that still have room to grow their valuations at high rates.

Historically, these often ride on the winds of change. Not hurricane flashes in the pan type winds, but gradual shifts that are too slow and boring to generate press coverage. These are like trade winds. Always there in the background, but sometimes imperceptible. Population declines, environmental changes, automation, and digitalisation, to name just a few. These are creating both incentives and pressures for businesses to invest in two ways: replacement and transformation.

Most businesses did their utmost to conserve cash during the Covid period. As we return to the new normal, corporates are under pressure to bring supply chains closer to home, improve energy efficiency and reduce harmful emissions. Almost every company we speak to also complains of skill shortages. This is especially the case at the two extremes of the labour market; highly technical academic research and hard, dangerous or highly manual roles.

The age of equipment, plant and infrastructure is high. Capex spending has been depressed for over a decade. To maintain efficiency, businesses will need to replace unproductive assets with new equipment that can deliver greater performance, using recycled materials, less waste and at a lower cost. Replacing and improving assets can drive much needed productivity growth.

Winners will not just be from the tech sector, but businesses who can combine hardware with software to deliver bespoke solutions to customers. Almost every sector will be required to invest to meet changing demands and regulations, which should make for a broader-based and healthier equity market.

Industrial businesses are positioned to play a key role. Many have changed significantly in anticipation, often exiting low margin, low return segments and moving into higher value add and less cyclical areas. Funds allocated to infrastructure spending will provide a tailwind.

Conversely, sectors with high levels of debts, who are being forced to invest are likely to struggle. Utilities look exposed in this scenario. Consumer and so-called defensive sectors may also lag, due to high starting valuations and competitive pressures.

Globally 2024 will bring many challenges, including ongoing conflict in Ukraine and the Middle East, as well as more than 60 elections. But there are also many reasons to be positive in 2024. Near shoring appears to be benefiting Mexico and other South American countries. India and South-East Asia have many attractions as favourable demographics, developing technologies and infrastructure continue to attract investment.

Lower interest rates will revive optimism and could finally spur investment. Rather than focus on the uncertainty of economic forecasts and predictions, this looks like a good time to find the companies that can invest to change and deliver value for global customers. Find the right business, be patient and unlike my former broker, trade infrequently.

Graham Campbell is senior investment director at River Global Investors