The first half of 2024 flew by in a flash.
The constantly changing economic landscape, marked by news of wars and US politics, made it challenging for investors to navigate the stock market and select sound investments.
One effective way to identify investment opportunities is to observe trends and their impact on various industries.
These trends should ideally be long-lasting, providing a strong boost to the businesses you’re researching.
More importantly, you should be seeking companies which are directly or indirectly benefitting from these favourable trends.
With these factors in mind, here are two intriguing sectors and companies to watch for the rest of 2024.
Artificial intelligence (AI)
Artificial intelligence, or AI, has been the buzzword this year, and Nvidia’s (NASDAQ: NVDA) impressive share price performance has left investors astounded.
The graphics processing unit (GPU) manufacturer has seen a year-to-date share price gain of 137%, building on a remarkable 246.1% rally in 2023.
However, investors might be wary of Nvidia’s high valuation.
Currently, Nvidia trades at a trailing 12-month price-to-earnings (P/E) ratio of almost 67 times.
But the GPU maker is not the only company benefitting from the boom in AI space.
There are companies such as Alphabet (NASDAQ: GOOGL) and Meta Platforms (NASDAQ: META) which are making moves in the AI arena and offer more attractive valuations.
For instance, Alphabet’s Google search engine has integrated AI into its popular products such as Gmail and Google Docs.
The company also has a robust cloud computing division that provides generative AI solutions to its cloud customers.
Meanwhile, Meta Platforms recently unveiled its latest Llama 3 AI model.
This mostly-free software can converse in eight languages, write high-quality computer code, and solve more complex math problems than its predecessor.
What’s more, Meta reported strong earnings for the first quarter of 2024, with revenue up 27% year-on-year to US$36.5 billion and net profit more than doubling to US$12.4 billion.
Compared to Nvidia, Alphabet trades at just 25 times its trailing 12-month earnings, while Meta Platforms has a trailing 12-month P/E ratio of 26.5 times, slightly higher than Alphabet.
If you prefer to avoid risky growth stocks, stocks in the semiconductor industry offer a solid alternative.
The AI boom will take time to benefit the middle and back-end semiconductor players, creating opportunities for patient investors willing to wait for the industry’s cyclical upturn.
The World Semiconductor Trade Statistics (WSTS) forecasts that the global semiconductor market will grow by 16% year-on-year to US$611 billion, followed by a 12.5% increase in 2025 to reach US$687 billion.
Speaking of beneficiaries, Singapore-listed Micro-Mechanics (SGX: 5DD), which supplies parts and consumables for the semiconductor industry, reported a 12.8% year-on-year increase in net profits for its most recent quarter.
CEO Chris Borch is cautiously optimistic that an upturn is just around the corner and is upgrading the group’s factories to “five-star factories” to capitalize on the industry gains.
Another local semiconductor player, UMS Holdings (SGX: 558), a provider of equipment manufacturing and engineering services for semiconductor original equipment manufacturers, saw a 44% year-on-year drop in net profit for the first quarter of 2024, down to S$9.8 million.
Despite the weak results, CEO Andy Luong expressed optimism, with the group recently acquiring new leasehold industrial land in Malaysia to prepare for future growth.
In a show of confidence, an interim dividend of S$0.012 was paid out, 20% higher than the previous year.
REITs
Apart from the semiconductor sector, another potential trend is in the form of physical real estate, specifically REITs (real estate investment trusts).
Since March 2022, REITs have been hit hard by the US Federal Reserve’s first interest rate hike since 2018.
To combat runaway US inflation, which peaked at 9.1% in June 2022, the central bank launched an aggressive series of rate increases.
The Federal Funds Rate jumped from 0% to a range of 5.25% to 5.5% in just 16 months, where it remains today.
Amid the rate hikes, REITs struggled with soaring interest costs as they refinanced loans at higher rates, squeezing distributable income and leading to lower distributions.
For instance, the Lion-Phillip S-REIT ETF (SGX: CLR), which gives investors exposure to 25 Singapore REITs (S-REITs), saw its unit price drop by 11.7% from March 2022 to the end of July 2023.
However, there might be a glimmer of hope for the sector later in 2024.
The latest US inflation reading was 3% for June, the lowest level in three years.
Meanwhile, the US labour market showed signs of weakening, with the unemployment rate rising to a two-and-a-half-year high of 4.1%.
These factors increase the likelihood that the US central bank may start cutting interest rates as early as September this year.
If this happens, it would relieve the pressure on S-REITs when refinancing their loans.
Many S-REITs are still reporting lower distributions due to the sharp rise in interest rates.
For example, Mapletree Logistics Trust (SGX: M44U) saw borrowing costs increase by 9.4% year on year, limiting its ability to pay out higher distributions
OUE REIT (SGX: TS0U) faced similar issues.
The commercial and hospitality REIT experienced an 18.5% year-on-year rise in finance costs for the first half of 2024.
Combined with a higher retention sum for working capital, the REIT’s distribution per unit dropped by 11.4% year on year to S$0.0093.
That said, with lower rates on the horizon, the REIT sector could see this headwind diminish in the second half of 2024.
As rates decline, it will be disadvantageous for a REIT to have too much fixed-rate debt, as this may limit its ability to refinance at lower rates.
Additionally, a strong sponsor can help the REIT lower its overall borrowing costs.
The sector may be undergoing a tough period now, but S-REITs with robust portfolios and strong demand should weather this storm successfully.
In effect, the current depressed environment also presents attractive opportunities to accumulate shares of well-managed REITs at a discount.
Get Smart: An eye on the business
While these two sectors may offer promising opportunities in the near term, investors should always focus on the long-term competitive advantages of the businesses within these sectors.
Valuations should be analysed alongside business prospects rather than in isolation.
It’s also crucial to consider the risks, as projections and economic estimates may not always be accurate.
If you’re unsure, start with a small position and gradually add to it as you become more familiar with the sector and business.
Here’s wishing you success with your investment portfolio for 2024 and beyond!
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Royston Yang owns shares of Alphabet, Meta Platforms, and Micro-Mechanics.
