As investors kick off 2024 amidst uncertain market outlooks, tentative economic growth and geopolitical turmoil, they have a lot of think about. This level of noise can make it especially difficult to uncover insights in the search for returns. In the latest iteration of its annual “Big Debates” series1, Morgan Stanley Research identified dozens of topics buzzing across a variety of sectors and regions where the firm’s views diverge from market consensus. Here are five areas of key concern to investors where we think the market may be missing the full picture—and that could drive stock markets, impact industries and shape the global economy in 2024.
1. Airlines Are Gaining Altitude
Revenge spending was the big story when it came to air travel in 2023, but the market isn’t sure that demand can keep pace this year. In the U.S., investors appear worried that carriers will overshoot, adding too many seats and routes as consumers and businesses pull back on domestic and international travel. That could undermine ticket prices and ultimately the bottom line. But Ravi Shanker, Morgan Stanley’s Freight Transportation and Airlines Analyst, thinks leisure and corporate travel will remain robust. He notes that such factors as equipment delays, high fuel costs and labor constraints will limit available seats, allowing airlines to continue charging a premium.
“Investors are worried that airlines will add meaningful capacity growth in 2024,” says Shanker. “However, our research shows that airlines are actually trying to pare back growth expectations, which should bode well for revenues from ticket prices.”
Meanwhile, in Europe, investors are also worried about soft demand and the effects of capacity constraints. However, Morgan Stanley analysts expect room for another solid year of revenue growth for travel on the continent, despite potential weakness in long-haul transportation, where additional flights could strain pricing. Overall, these trends could favor low-cost carriers but pose a risk to flagship airlines.
2. Decarbonization Sustains Its Investment Potential
Markets are taking a dim view of sustainable investing’s growth potential, in part because of what many see as slow progress on the transition to renewable energy: Prices have gone up as producers sought to hold on to profits amid high interest rates, and some investors believe this will spell lower customer demand in 2024. However, Morgan Stanley Research thinks the impact of high rates is baked into renewable energy prices, which still provides better economics than, say, natural gas. And companies should have more room in their budgets to invest in expansion plans when rates start coming down, expected in the second half of the year. We like high-quality renewable energy developers, which have seen unwarranted drops in their valuations based on the market’s negative view, but think small players could face challenges.
More broadly, decarbonization to meet net-zero targets remains a priority of governments around the globe. As a result, measures such as tax credits and subsidies provide long-term support to sustainability as an investment theme. “We hold firm to our ‘rate of change’ screen for sustainable investing, focusing on companies delivering incremental gains toward decarbonization,” says Stephen Byrd, Morgan Stanley’s Global Head of Sustainability and Clean Tech Research.
3. Tight Copper Is the New Normal
After a turbulent few years, disruptions to global copper supply appeared to be moderating last year and disruptions largely limited to Chile, where drought and production delays hampered output of the material crucial to energy transition. Most investors seem to believe these constraints are in the past, and some forecasts called for as much as 10% growth to pre-disruption production, pointing to the delayed opening of a massive new mine in Chile as well as ramp ups in Peru and Democratic Republic of Congo. That scenario would push copper into surplus territory for 2024. But Morgan Stanley Research Commodity Strategist Amy Gower and her team have a different take: “We think disruption is here to stay. Rather than a glut, we expect a deficit of 340 kilotonnes this year. This disparity should show up in pricing by the second quarter, with prices in London hitting our bullish target of $9,000/tons, or roughly 8% higher than 2023.” A mine closure in Panama and significant guidance downgrades from key producers are two harbingers of accelerated disruption ahead. With futures prices for the physical commodity at historically higher levels than spot prices, investors may look to equity opportunities, and specifically miners with strong prospects for volume growth and operational improvement.
4. India’s Run Continues
India is on track for a decade of phenomenal growth, driven by three megatrends: global offshoring, digitalization and energy transition. As the world’s supply chains continue to realign in a rewired global economy, India is poised to become an attractive alternative for electronics manufacturing, which could lead the sector to expand by 21% a year to reach $604 million by 2032, according to Morgan Stanley Research forecasts.
Despite this potential, investors are skeptical that India can best regional peer China for the fourth year in a row. They anticipate volatility from an expected general election in the spring of 2024, coinciding with an uplift in China markets from the government’s efforts to stimulate the economy. Morgan Stanley Research, however, favors India’s growth picture and sees GDP growth—which they forecast to be above 12% for 2024—more than double that of China.
This also puts companies operating in India in a better relative position to deliver earnings growth. Therefore, investors who think that India’s outlook is already priced into the market may want to reconsider, says Ridham Desai, Morgan Stanley’s Chief Equity Strategist for India. “The market seems to be taking the view that Indian equities will level down to subpar growth in 2024, but we think we are only halfway through a profit cycle that will yield 20% compounding earnings growth over the next four to five years.” Desai sees the start of a new capital investment cycle, a healthy banking system, lower corporate tax rates and improving balance in trade and consumption among factors supporting the upward trend.
5. Obesity Drugs Could Drive Behavioral Shifts
Obesity drugs have taken the world by storm over the past two years. Use of the innovative class of hunger-suppressing medicines is growing, both for weight management as well as to treat related illnesses such as heart disease and diabetes. An estimated 24 million people in the U.S., or 7% or the population, will be taking these drugs by 2035, according to analyst estimates.
Investors have recognized that changing consumer behavior could pose a challenge to the food industry, but appear to question whether obesity drugs’ potential impact may be overblown. Morgan Stanley Research, however, continues to expect that obesity drugs will have broad and lasting implications across food-related sectors as consumers eat less and make more nutritious choices. “This shift could eat into demand for confections, baked goods, sweet and salty snacks, alcohol, soft drinks and other unhealthier fare,” says Morgan Stanley’s tobacco and packaged food analyst Pamela Kaufman. “On the other hand, companies with existing healthy options and those with weight-management and energy-boosting offerings should offer opportunity for investors as the behavioral effects of obesity drugs unfold.”
