12 crowded trades to avoid in 2024

Throughout 2023, I've been saying interest rates would be cut. But now, that's consensus and the market is pricing in a lot of interest rate cuts next year in 2024. 

I think that is correct, but not in the short term. I think the market's probably gotten a little bit ahead of itself in pricing the interest rate cuts. I don't think it will happen as fast as the market expects, so I'd expect an unwinding of that trade in the next three to four months.

Sticking with the thematics around bonds, because earnings and interest rates are what drive valuations. I think the US 10-year bond and US interest rates are the key to the global markets. 

There is this idea that the Federal Reserve is going to possibly cut at the end of the first quarter, and definitely by May or June. That's what the market's pricing in but I think it's going to take a bit longer. They won't cut until they see inflation come down to 2.5%, and maybe a bit below that, and that might take a while. 

But I'm not too worried about that because I think growth will be stronger overall like it has been in the last two years. So there's an offset there, and that's why I still remain bullish. We'll get there, but not that early.

Copper is essential for decarbonisation, the energy transition, and the electrification of the economy. There are hundreds of billions of dollars being spent to get rid of carbon in the atmosphere and get onto electric vehicles and renewable energy. 

Copper is absolutely critical, and because of that thematic, it's very well-owned and I think people are owning it more so than they probably should have. Copper should have been lower. That is not to say that we don't think it'll be substantially higher in the future, but riding this muddle through the year, I think copper would've gone lower if people weren't so convinced on that macro theme.

I think in terms of what's been happening over the last year, we've had a very narrow and uneven rally in markets, and you can essentially see this in the way in which some generative AI-exposed stocks like Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and NVIDIA (NASDAQ: NVDA) have rallied over the past year. 

If you look at these companies as a group, they've gone up around 120% over this past year. If you strip those names out, including Apple (NASDAQ: AAPL), you see that they contributed around 7% to the index performance. So it's incredible when you think about six to seven stocks, really just accounting for 7% of market performance this year.

I think in terms of the opportunities out there, the poster child this year has been NVIDIA. But I think when a company is priced to perfection, there's been a lot of momentum there. It's a great company, they make the GPUs out there which enable AI. We think that there are opportunities beyond that.

If I look at 2023, I think one of the themes was dud deals. You saw Orora (ASX: ORA) with Saverglass, and the market hated it. Treasury Wine Estates (ASX: TWE) with Dow, the market hated it. Even a few years ago, CSL (ASX: CSL) with Vifor, that's shaping up to look like a bit of a dud. EBOS Group (ASX: EBO) couldn't get away with their Greencross Vets acquisition. So the market's just done with large acquisitions. 

Now, I think history would suggest that's quite wise. There are a lot of risks and it's a bit of a corporate graveyard, but they're going to get it wrong every now and then. And I think Orora, at the current valuation, does look interesting.

The work we've done suggests that Saverglass is a pretty decent business and that they paid a pretty fair price, and I think it's got caught up in this short-term de-stocking cycle. You're seeing a lot of luxury spirits brands downgrade, and I think that's weighing on the stock. 

I think you're right to be wary about most large deals, but in this instance, given the value destruction in that stock, I think the market's pricing in a sure thing, when it could very well turn out to be an OK deal.

Certainly, a soft landing in the US is almost a consensus call at the moment. But if you look at the steepening of the rate tightening cycle that the Fed's undertaken in the last year or so, it's the steepest since 1979. 

The last time we saw this steepening of the interest rate curve, it was a double-dip recession in the US and a pretty prolonged economic downturn here as well, back in the late 1970s, and early 1980s. So, we're really mindful that the US may not be the soft landing outcome that everyone likes.

And then conversely, China. Iron ore is at $130 a tonne. Everyone's sitting back going, "How good's that? It's looking pretty good." But if you look at copper prices, lithium prices, and other industrial metals, those prices have come right down. This suggests that not everything on the ground in China is progressing as well as it could be and that's a risk for the Australian economy.

The biggest area of debate is around interest rate cuts. And I think that it's interesting that everyone seems to be very hopeful that they're coming in the first quarter or the second quarter. We're not so sure that occurs. 

We're looking from the bottom up all the time, but I think that the idea that central banks are going to start bailing people out by cutting rates and it's back to the races - that looks a bit optimistic to us at this stage.

I think the market's priced in a soft landing now. On the inflation side, it's assuming that the Fed won't be raising any more. The next move in rates will be down, and you've seen a big move in bond rates. But then on the other side, it's assumed that there will be a soft landing. 

Sometimes bond rates move because the bond market is anticipating a recession and so I think that's probably the biggest risk to markets in 2024.

Right now, as we sit here today, the US is pricing in five interest rate cuts for 2024. We don't see it being that high. We might see, we think, one or two, even three rate cuts next year in the US, and the US has typically moved six to nine months ahead of the Australian economy.

At the start of this year, people were thinking, "We're going into recession, house prices in Australia will be down 20%." It hasn't played out that way.

We've had the soft landing, and credit to the RBA for that. But through this cycle and coming out of COVID, the US has consistently been around six months ahead of the Australian economy. We think that's the case again here. 

Certainly, we think that the fundamentals remain strong for the overall economy here and also in the US, and so therefore we just don't see the pace of rate cuts that's currently being priced in right now, playing out that way.

2023 was a year of two main thematics. So in the first half, everyone went crazy about AI because of the launch of ChatGPT. And in the second half, the market focused on the GLP-1 drugs. And I think that the market has gotten the positive side of that story right. We own Novo Nordisk, which has done incredibly well because of the way that those drugs are going to come to market. 

But the flip side of that coin is the GLP-1 losers, and a lot of those are healthcare stocks and food and beverage stocks. And the idea of the market is that if a certain amount of the population goes on Ozempic, they're never going to eat a Frito-Lay or drink a Pepsi again. And I think that the losers of GLP-1 are probably mispriced.

So, Pepsi (NASDAQ: PEP) is a stock that we own in the portfolio, and it hasn't done well since the Novo Nordisk trials. But if you look at some of the numbers, the impact on Pepsi sales could be 1-3% over many, many years. And the stock is down quite a bit. So I think that there's some mispricing going on in the losers from GLP-1 drugs.