Global growth and shorting opportunities abound

2024 was a stand-out year for global equity markets. The tech heavy NASDAQ index has generated 37.6% year to date, made all the more impressive by its 44.9% return in 2023. 

The superb performance of the U.S. market has been largely driven by the Magnificent Seven of Nvidia (183%), Meta Platforms (74%), Tesla (41%), Amazon (40%), Apple (26%), Alphabet (23%) and Microsoft (16%). 

The ASX 200 has returned a very respectable 15.7% in 2024, while the worst performing major index, the Euro Stoxx 50 still managed to produce a double-digit return of 11.7%.

There has been a wide divergence in returns by sector, with the MSCI World Materials sector delivering 9%, weighed down by a slowing China, while Financials, IT, and Telcos delivered returns of around 40%.

What to expect in 2025 from the asset class?

The elevated interest rates of 2024 provided a favourable environment for Plato Global Alpha’s short positions, allowing us to capitalise on pressure faced by overvalued, debt-heavy companies. This strategy has been a cornerstone of our performance, with 70% of our outperformance since inception stemming from shorts, including notable successes such as Tabcorp (ASX: TAH) and Liontown Resources (ASX: LTR) in the lithium sector.

Looking ahead, the global rate cycle appears to have peaked in most major economies. In the U.S., our base case projects a gradual easing of the Federal Reserve's lower bound target to approximately 3.1%. Meanwhile, the Reserve Bank of Australia (RBA) - notably one of the last central banks to raise rates - is likely to be among the slowest to implement meaningful cuts. We expect the RBA's cash rate to settle around 3.6% by Q4 2025.

As global rates trend lower, this shift should benefit our long positions, particularly in high-beta growth stocks. Companies like NVIDIA Corporation (NASDAQ: NVDA), a leader in AI, and Salesforce, Inc. (NASDAQ: CRM), a key player in cloud technology, are well-positioned to thrive in a more accommodative monetary environment.

It’s tempting to interpret current equity market valuations as a sign that a sell-off is imminent. For example, the Shiller Price-to-Earnings (P/E) ratio of the S&P 500, named after Nobel laureate Robert Shiller, stands at 36, placing it among the most expensive 3% of valuations since 1881.

However, while valuations are reliable predictors of long-term market returns, they have little utility in forecasting performance over shorter, one-year horizons. The correlation between valuation metrics and annual returns is near zero. Over shorter timeframes, market psychology and sentiment tend to outweigh fundamentals, and at present, sentiment remains robust.

Where is the value and the opportunity?

We believe we are in the midst of a decade-long mega-trend of unprecedented defence spending. Geopolitical tensions in regions like the Middle East, Taiwan, and Ukraine, coupled with U.S. strategic ambivalence, have only accelerated this shift. 

Within this space, we see significant opportunities in Lockheed Martin (NYSE: LMT), BAE Systems (LON: BA), and Rolls Royce (LON: RR). Beyond their exposure to rising defence budgets, these companies provide an additional advantage: their defensive nature in portfolios, often performing well during periods of heightened geopolitical instability.

In the healthcare sector, we’ve had strong convictions in Novo Nordisk (CPH: NOVO-B), the makers of the groundbreaking anti-obesity drug Ozempic. However, we are even more bullish on Eli Lilly (NYSE: LLY). Their drug Mounjaro has demonstrated approximately 50% greater efficacy at a lower cost, positioning it as a potential market leader. These drugs are being hailed as the "Swiss Army knives" of modern medicine, with emerging data showing potential applications for conditions as diverse as heart disease, diabetes, infertility, Alzheimer’s, arthritis, and addiction.

One company we’re closely watching is Vertex Pharmaceuticals (NASDAQ: VRTX) in the U.S. The opioid crisis remains a global epidemic, with The Lancet Regional Health – Americas estimating that 60 million people struggle with opioid addiction and over 100,000 die annually from overdoses.

The demand for a non-addictive, effective painkiller is immense, and Vertex Pharma may have the solution with their new drug, Suzetrigine. Having successfully completed Phase 3 trials for treating chronic pain, Suzetrigine is expected to receive FDA approval and enter the market in 2025. This breakthrough positions Vertex as a potential game-changer in addressing one of the world’s most pressing health crises.

Closer to home, we see continued upside in Qantas (ASX: QAN). Last September, during a period of intense public and media scrutiny - and a short-selling frenzy - we articulated a bullish case for the national carrier when speaking to Chanticleer. Despite the controversy, we focused on its compelling valuation, structurally higher (+40%) sales per employee post covid, and a dominance (65% market share and growing) in the domestic aviation market. Since then, Qantas shares have climbed 66%, and we believe the stock still has more runway ahead.

The recent exit of Rex from certain routes further solidifies Qantas’s market dominance, reinforcing our positive outlook.

Where are the risks?

Plato Global Alpha has the advantage of being able to take short positions in companies we believe will underperform. We look for companies with a high number of Red Flags using Plato’s proprietary model. In Australia we are short Tabcorp (ASX: TAH), Mineral Resources (ASX: MIN), and Corporate Travel (ASX: CTD).