We start the new year with the Oracle Investment Management team revealing their predictions for 2024, following the tradition of previous years.
Our projections for the year are not our base case scenarios. Rather, we aim to initiate thoughtful discussions on a range of topics that we may encounter in 2024.
We are excited to share these predictions with you and hope that they will provide valuable insights into what lies ahead in the world of finance and investing.
Trump is convicted yet returns to the White House – chaos ensues
Despite not attending a single GOP debate for the 2024 nomination, Donald Trump remains the frontrunner for, not just the Republican nominee, but to win the election. Sportsbet have his victory at $2.25 versus Joe Biden’s $2.88 (on 12 December 2023). Making a prediction for the favourite may not seem very bold, but let me remind you that Trump not only orchestrated an insurrection and tried to – illegally – overturn a fair election, but he is also facing four separate criminal indictments totalling 91 felony charges.
For any mere mortal, this would end a campaign before it began. But Trump has a way with the people and will use every trial and any conviction to his advantage by suggesting it is nothing more than an unfair attack on his character by Democrats who will use any trick in the book to win the election. This has been the playbook so far, and his followers seem to be buying it.
When Trump is involved, all bets are off and anything can happen. Four separate trials await the former president, but I wouldn’t be writing him off just yet.
Stock market Impact from weight loss drugs will be contained
The threat of weight loss drugs (such as Ozempic and Wegovy) has impacted many company share prices in 2023, particularly in healthcare but also in food. In healthcare obesity is the cause of many other disorders, and food because people using the treatments will be eating less. Our prediction is that demand for GLP-1 drugs remains strong, but the flow on impacts on other industries will be relatively minimal.
Companies that treat kidney dialysis, sleep apnea, or diabetes are just 3 that markets think will experience lower demand if the number of obese people reduces. There may be some reality to that expectation, but we think the long-term impact will be minimal for two few reasons:
- The drugs are not a silver bullet. There are side effects, which are very uncomfortable and may cause users to stop taking the drugs.
- The drugs are not a permanent fix. GLP-1 drugs reduce appetite, and when one stops taking them, appetite returns and it is likely the weight will too. See point 1 as to why many users won’t take these permanently.
With regard to its impact on food demand, if you enjoyed a Big Mac before you started on Ozempic, chances are that you will still enjoy a Bic Mac after you lose a few kilos. You may even feel less guilty about it. The same goes for packaged products such as Coca-Cola or chocolate.
The industries we think are most at risk would be other weight loss programs such as Weight Watchers (NAS: WW) or Lite N Easy, but this is because of direct competition, not because of flow-on effects.
Small Cap equities to outperform Large Cap equities
Investing in small-cap equities holds strong merit for a variety of reasons. Over a 33-year period, small caps in Australia have demonstrated robust returns, outperforming both the MSCI World and the MSCI Emerging Market indices. While the Australian market has yielded over 9.5% per annum, active small-cap managers have significantly surpassed this, achieving a remarkable 12.4% per annum. This notable outperformance underscores the growth potential inherent in smaller companies.
Furthermore, the current market conditions present an interesting opportunity for small-cap investments. The small-cap index, the Small Ordinaries has experienced a substantial and prolonged drawdown relative to the broader ASX200 index, echoing patterns seen in historical market downturns such as the Global Financial Crisis and the tech wreck. However, the small-cap drawdown is already 24 months through, surpassing the durations of previous downturns, 18 months for the tech wreck, and 15 months following the GFC. This situation, combined with increased liquidity challenges in small caps, positions the market for a potential bottoming, making high-quality small-cap companies available at discounted prices. History shows that when this underperformance abates, significant outperformance follows very quickly. With Small Cap Price to Earnings ratios trading much cheaper relative to the broad ASX200 index PE ratios than 3, 5 and 10-year averages, conditions are ripe for Small Cap equities to outperform large cap in 2024.
Chart: Small Ordinaries performance relative to ASX200
S&P/ASX200 to provide more than 15% total return in 2024.
Markets are coming off a cyclical low of the last two years and earnings growth recover. Moreover, interest rates are likely to fall significantly both in Australia and globally, which should boost the valuations of stocks. Consensus is still pessimistic and should progressively become more and more as the market advances. Overall, we see 2024 as a very strong year for the Australian stock market.
News Corp to IPO Foxtel in 2024
The long-awaited IPO of Foxtel will finally come to fruition according to this analyst. After years of media talk around an upcoming listing for Foxtel, we believe it will finally occur in 2024. It was reported at the start of the year that both large shareholders in Foxtel, News Corp and Telstra, are keen to list the business once capital markets recover.
In the most recent News Corp report, the notes to the financial statements tell us that Foxtel has refinanced three loan facilities that were due in 2024. This removes the debt from current liabilities to non-current liabilities, improving working capital. While big businesses like Foxtel tend to refinance debt 1 year before maturity, going into an IPO marketing round with no debt as a current liability improves the strength of the balance sheet for investors.
The sale of assets by News Corp is why it is one of our core holdings in the Emerging Companies Portfolio. On our sum of the parts (SOTP) valuation, we believe NewsCorp’s assets are undervalued by 22%. An IPO of Foxtel will assist in closing the discount to value.
China is unlikely to advance towards large-scale commercialisation of 5nm process node technology in 2024.
As stated by Chris Miller in his book “Chip War”, microchips or more correctly, semiconductors are the new oil – the scarce resource on which the modern world depends.
Two of the three global semiconductor companies that we have coined the “Semi triangle” (ASML, TSMC and Nvidia) are not US companies. ASML is a Netherlands-based company. TSMC is a Taiwanese company and boasts a global market share of over 59% for semiconductor foundry (or fab) revenue. TSMC’s dominance is even more pronounced in advanced nodes – it holds an estimated market share of 90% for 5nm and below technologies.
The modern semiconductor landscape is changing fast. Until recently, the US designed the most advanced semiconductors or “chips”. China today is spending more money importing chips than oil. The 2018 US National Defense Authorization Act (NDAA) designated Chinese telecom giants Huawei and ZTE as national security threats, restricting their access to US technology, including semiconductors. However, the most recent comprehensive export controls (October 2022) are targeting China’s ability to acquire and develop advanced computing and semiconductor manufacturing technologies. These controls included restrictions on
1) EUV lithography machines from ASML and other US-based companies, crucial for manufacturing the most advanced chips;
2) Semiconductor manufacturing equipment made with US technology, even if produced by foreign companies
3) Certain advanced chips used in high-performance computing and artificial intelligence applications, from Nvidia and other leading companies.
At the turn of the new century, the combined market share between the US and Europe in semiconductor manufacturing or production was 62%. East Asia (China, Japan, Korea, Singapore and Taiwan) accounted for the balance, with China’s contribution estimated at between 1% and 2%.
Enter SMIC – the company was established in April 2000. Since then, the company has grown into a major player in the global semiconductor industry, becoming the leading semiconductor manufacturer in China and one of the largest foundries worldwide. It has played a crucial role in China’s ambitions to become self-sufficient in semiconductor production. Since 2000, the market share of SMIC has increased to 11% today, which if added to the market shares of Japan (15%), Korea (8%), Taiwan (40%) and Singapore (5%), implies East Asia is responsible for almost 80% of global semiconductor production. The US has witnessed its market share declining to around 12% (from 37% in 2000), whilst Europe today accounts for only 8% (it was 25% in 2000) of global semiconductor production.
Huawei, the market leader in 5G telecommunications infrastructure equipment and a leading mobile handset manufacturer, recently announced the Kirin 5nm chip in a new laptop which triggered a new round of debate about whether the US-sanctioned company has achieved new technological breakthroughs or just used some inventory made in Taiwan.
A similar debate was seen when Huawei unveiled the Kirin 9000s chip, a 7nm chip used in its Mate60 Pro phone, in late August 2022. Technology experts later found that the processor was made by SMIC with its N+2 process via deep ultraviolet (DUV) lithography.
The Chip War has claimed Japan and Russia as casualties, against the US. That was before the year 2000.
Will the “new” Chip War claim China as a casualty as well? In our view, it all depends if Chinese companies such as SMIC can advance in process technology beyond 7nm, towards 5nm and ultimately 3nm. There is one company (ASML) that holds the key to the question.
It is unlikely that China can succeed in building its own EUV scanner. When introduced, it will no longer be cutting edge. By that time, ASML will have introduced a new generation tool, called high-numeric aperture (NA) EUV, which is scheduled for release around the 2024-2025 timeframe, at an estimated cost of U$300m per unit, twice the cost of the current (first-generation) EUV machine.
If US sanctions persist, we predict SMIC, or for that matter, any of the 32 new fabs that are estimated to go online in China in 2024, is unlikely to advance to 5nm or 3nm technology on a commercial scale. For now, we predict the US will maintain its supremacy in semiconductors, at least until the middle of this decade.
Toyota still does not emerge as the best competitor to EV pure-plays in EV in 2024
It is now many years that Toyota as the world’s leader motor vehicle manufacturer (“automaker”) have straddled technologies such as internal combustion engine (ICE), electric vehicle (EV) and hydrogen (fuel cells).
Toyota was the first major automaker to launch a commercially available hydrogen fuel cell vehicle (FCV), the Mirai, in 2014. They’ve sold over 11.7m hybrid vehicles globally, demonstrating their expertise in alternative fuel technologies. However, sales of FCVs account for less than 1% of Toyota’s total sales.
In hybrid ICE vehicles, Toyota has sold over 51.2m vehicles globally since launching the Prius in 1997. Other popular hybrid models from Toyota include the Corolla Hybrid, Camry Hybrid, RAV4 Hybrid, and Highlander Hybrid. Toyota is the world’s leading automaker of hybrid vehicles, dominating the market with a significant share.
However, the EV sales of Toyota have not yet matched their hybrid success, although they are making significant investments in expanding their EV offerings in the coming years.
In China, the market share of Toyota is mainly ICE technology. However, new sales of EVs today in China account for 30% to 40% of total new motor vehicle sales. Why is China so important? Well, firstly it is the world’s largest automotive market, with sales of 26.9m units, compared to the US in second spot at 13.8m, followed by India (4.4m), Japan (4.2m) and Germany (2.9m). Secondly, the Chinese market in EV technology is growing by leaps and bounds – per the China Association of Automobile Association, Japanese automakers’ market share in the region has fallen from 20% in 2022 to 15% in the first half of 2023. EV sales in China reached over 2m through the first five months of 2023, up 51.5% YoY as buyers continue adopting EVs at a record pace.
Japanese automakers, who have been arguably the biggest laggards in the EV market, are feeling the pinch the most. For example, Mitsubishi Motors revealed early in 2023 that it was suspending operations in China indefinitely after sales fell drastically. Nearly all Japanese automakers, including Honda, Mazda, and Nissan, are seeing sales fall in China due to a lack of EV models to compete with domestic automakers. Sales of Chinese brands accounted for 53% of the market through the first half of 2023 as domestic EV makers like BYD, NIO, Li Auto, and XPeng continue to grab market share. During October 2023, for the first month ever, BYD had more global sales than Nissan.
The only EV pure play that is standing its ground in China, not being a domestic automaker, is Tesla. Per industry data, the market share of Tesla (October 2023) is around 10% – it was higher earlier in the year but production challenges at its Shanghai Giga-factory, impacted deliveries.
After taking over from long-time leader and grandson to the company’s founder (Akio Toyoda) in April, former Lexus branding chief officer Koji Sato said Toyota would need to act urgently to keep up in China’s EV market.
Two aspects come to mind – the solid-state battery and Giga castings. In the case of the solid-state battery, Toyota expects the technology to be implemented from 2026 to 2028. The company announced in September 2023 a “breakthrough” in solid-state battery technology, causing it to shift its “development focus to mass production”.
In the meantime, we must assume that automakers overall are working on advances in battery technology – the most important aspect to us is not the increase in mileage but rather the cost.
The first Giga casting from Toyota which will help it achieve a lower cost of manufacturing for upcoming all-EVs based on a new architecture, is coming to the market in 2026 (only). The first EV based on the new, purpose-built architecture will debut in 2026 under the Lexus brand, with a next-generation lithium-ion battery that will enable a driving range of over 600 miles, per the company.
Toyota so far had a schizophrenic attitude toward EVs. It is our prediction the company will continue to lose EV market share in China , not only in 2024 but in 2025 as well, and the global transition to EV also negatively impacting its overall global market share. Associated with such prediction is our view the P/E rating appears out-of-line compared to stocks such as BMW and Stellantis, both automakers in our view more successful in transitioning from the ICE era to the future of EV technology.
Kim Jong Un Wins!
With the North Korean election being held in March, we thought we would stick our neck out and call it early. Kim Jong Un will win with a landslide victory, capturing 100% of the vote.
At the North Korean regional elections in November, it was reported that 99.91% voted for the Supreme People’s Assembly, with 0.09% of dissenting votes called out. The regional elections marked the first polls since North Korea revised its election law in August, allowing multiple candidates.
It is also the first time that North Korea has referred to dissenting votes since the 1960s. Despite their best efforts to display a democratic process we don’t expect their to be any dissenting votes in the national election in March.
We’re excited to see how things shape up this year and whether our predictions for 2024 come true! It’s always exciting to see the future unfold before our eyes, and we hope to gain a better insight into what’s in store for us.
Written by the Oracle Investment Management team