As we move into the new year for 2024 on the back of a strong rally both locally and international markets, it’s important to dive into the outlook for key sectors and assess factors that may impact their valuations.

The technology sector was THE sector of 2023 with the local tech index rising 28% over the calendar year. This was driven by low valuations on the back of the 2022 sell-off, the hype around AI and its hyper-efficiency capabilities, and increased certainty around interest rate outlook for 2024 with at least three interest rate cuts on the horizon for the US. While investor enthusiasm is strong for the AI evolution to expand into 2024, we may see a slight pull-back in tech stocks early in this new year, as the price investors are paying for some companies earnings has escalated above what analysts are expecting, for example, WiseTech Global (ASX:WTC) has a hold rating from Bell Potter currently due to slowing earnings growth.

Retailers surprised the market in 2023 with the sector rising almost 17% over the year, however, with the outlook for retail spend to slow and a move in sales spend, we may see some discretionary stocks remain resilient in the new year while others may come under pressure. Fashion jewellery company, Lovisa (ASX:LOV), rose 5.3% in 2023 and remains a key retail pick that has a buy rating from the Bell Potter analyst due to its low ticket prices and high replenishment nature. Lovisa’s growth strategy is primarily driven by new store openings on a global scale, and with 836 stores open worldwide and the first store in China set to open soon, the company’s growth trajectory is looking strong. For other discretionary names, 2024 may present some further headwinds as cost-of-living pressures continue to eat into consumer spend. Eagers Automotive (ASX:APE) on the other hand has a hold rating from Bell Potter due to the expectation of reduced consumer discretionary spend especially on higher ticket items. Given the market leading nature of Eagers Automotive though and its strong balance sheet, the company is well equipped to weather any downturn in consumer spend, particularly when the benefits of its most recent acquisition are realised.

Across the retail space, there has also been an uptick in e-commerce spend which positions online retailers well for resilience through the anticipated overall slide in consumer spend, while placing further pressure on physical bricks-and-mortar retailers listed on the ASX.

When it comes to the miners, both explorers and producers, understanding the commodity cycle is important alongside the other macro factors that impact the financial and operational side of the business. For explorers, high-quality assay results, a high-grade resource and/or a timeline to production is the key to attracting investors, which has been the case for a few names in the gold mining space over 2023 as the price of the precious commodity continues to hover around a 50-year high.

For other explorers in the bottom of a commodity cycle, like lithium which has been heavily sold off in 2023 amid dampened outlook, this cycle driven investment idea proves relevant as Patriot Battery Metals (ASX:PMT) is still a few years away from production but boasts the largest lithium pegmatite mineral resource in the Americas at its Corvette project in the James Bay region of Quebec.

At the other end of the commodity market, nickel producers have faced strong headwinds in 2023 that are expected to last into 2024 despite the commodity’s key role in the green energy transition. The price of nickel has fallen 45% over the last year primarily due to China’s declining imports and demand for nickel, and rising supplies of the commodity as the world reduced reliance on Russia for supply.

Transforming from an explorer to a producer of a commodity has equal upside as it does risk potential, which investors are very reactive to. CAPEX and OPEX are a big indicator of how well a mining producer is operating both functionally and financially, and some key names made waves last year for making the jump from explorer to producer including Bellevue Gold (ASX:BGL). Once the transformation of explorer to producer is complete, the challenges then arise for maintaining lowest production costs possible to maximise margins made on production and ramping up to full capacity rates which in the case of Bellevue Gold’s production plant, is 200,000 ounces per annum.

While copper had a false start last year, the outlook for 2024 is strong from a number of analyst’s and fund manager’s perspectives. The prediction is that supply of copper will fall short of demand in the coming years and with its vital role to play in the green energy transition in mind, this is likely to fuel a spike in the price of the commodity. Copper’s role in the clean energy transition is for energy storage, EV batteries, solar panels, and wind turbines among other uses.

Financials were a key staple in many investor portfolios throughout the rising interest rate period of 2022-2023 however given the outlook for rate cuts is on the horizon and the way in which big bank Net Interest Margins (NIM) have peaked, investors are increasingly looking elsewhere for financial exposure heading into 2024. Diversified financials are attracting investors in recent times through the variety of financial services offered, especially in growing industries. Bell Potter has a buy rating on Perpetual (ASX:PPT) as despite the weaker-than-expected results in FY23, the company has a strong management team, is set to realise the benefits of its recent merger with Pendal in the new year and has strength in the corporate trust business which is a sticky and growing revenue stream for the company.

Staples stocks also surprised the market on the negative side in 2023 as companies in this sector traditionally are able to pass on rising costs to customers without impacting demand for their goods and services, however, last year bucked this trend and saw the sector fall 2.24% over the year. For the supermarket giants, Woolworths (ASX:WOW) prevailed throughout 2023 as Australia’s leading supermarket both in terms of market share and performance as well as expanding its presence in the $3.7bn pet retail market. Coles Group (ASX:COL) on the other hand, faced turbulence in 2023 after reporting a total loss covering stock loss, waste and markdowns increased on FY22, and financing costs for continuing operations rose 9.4% on FY22 amid higher borrowing costs. These two supermarket giants provide good examples of the diverse ends of the staples sector and why cost management is key to growth, even for staples stocks.

REIT stocks faced some pressure on a margin front in 2023 following the rise of the ‘work-from-home’ movement causing higher than expected office vacancies, and higher interest rates increasing costs to be worn by the REIT companies. The outlook for REIT stocks is bright heading into 2024 though as there is increasing demand for industrial REITs including data warehouses and distribution centres. Goodman Group (ASX:GMG)  is one example of an industrial REIT many analysts are bullish on given the company introduced price increases in 2023 that led to margin expansion and a higher profit than expected. With ‘return-to-work’ policies now being introduced across a number of large organisations, we may also see a rebound in office REITs in 2024.

Healthcare stocks came under pressure over the last year, however, are touted as the sector to rebound in 2024. 2023 saw a large number of healthcare stock valuations decline for a number of reasons including a shift away from COVID-focused production and back to the clinical trials in the works pre-pandemic. This resulted in a reduction of short-term earnings potential prior to regulatory submission and commercialisation, and rising interest rates increased debt repayments and overall operational costs.

For some names that have been on a rally recently, the sky is the limit heading into 2024. Neuren Pharmaceuticals (ASX:NEU) is the name of the moment after not only hitting commercial phase for its Daybue drug that is the world’s first and only approved treatment for Rett Syndrome, but also announcing strong clinical trial results for the treatment of Phelan-McDermid syndrome and the progression of the company’s second drug for the treatment of four neurodevelopmental disorders.

ResMed (ASX:RMD) came under pressure in 2023 amid margin contraction on the company’s sleep apnoea products, which many analysts believe was overdone as the stock trades almost 20% lower over the last year. The market sell-off in ResMed is also believed to be on the back of the rise in weight loss drugs including Ozempic which is said to reduce some cases of sleep apnoea, which according to analysts and the ResMed CEO, is not the case and there will always be a market for sleep apnoea sufferers thus retaining demand for ResMed’s core products. If anything, the rise in weight loss drugs prove to be a complimentary not supplementary product to sleep apnoea treatments. For these reasons, 5 brokers retain a buy rating on ResMed and see it is a key investment opportunity in 2024.

Overall, the market rally that ended 2023 with a bang is expected to show signs of resilience into the new year both locally and globally. Diversification remains a key strategy in building your portfolio so as to spread risk across the different sectors and asset classes. There are some key investment opportunities in direct equities in 2024 across a number of sectors.

With the outlook in mind, looking back at 2023, how are the top 3 equities on the ASX performing in the first year of the new year?

Neuren Pharmaceuticals (ASX:NEU) topped the ASX200 gains for 2023, soaring a huge 214% after taking the world’s first treatment for Rett Syndrome to commercialisation phase and receiving top-line results for its Phase 2 clinical trial of a second drug for the treatment of Phelan-McDermid Syndrome in children. With no current treatment available on the market for the treatment of Phelan-McDermid syndrome, the sky is the limit for Neuren’s potential revenue runway. Since January 1 this year, NEU is down 3.6% to $23.93 per share, however, this could simply be attributed to some profit taking after the stocks’ impressive run over the last year.

Emerald Resources (ASX:EMR) took out second place on the ASX200 gainers list for 2023, with the gold miner advancing 155% over the course of the year. The price of gold sitting at 50-year highs at the end of 2023 and a strong operational performance by Emerald in both 2023 and the start of 2024 were the reasons behind investors flocking into the gold miner over 2023. Looking at the first month of 2024 and the rally has continued with EMR shares currently up 14.41% since January 1st, 2024, even against a declining gold price of late. The rally extending is thanks to ongoing strength in the company’s performance outlined in the December quarter update released on 30th January including achieving the upper end of guidance with low AISC, strong gold sales in the three-month period, and the maintenance of full year guidance for FY24.

James Hardie Industries (ASX:JHX) rounded out the top 3 gainers on the ASX200 in 2023 with a boost of 117% over the year. A remarkable turnaround for the company to place in the top 3 after a turbulent year for building materials companies across the board in 2022. James Hardie rose to the top of the ASX200 through implementing price increases across its divisions which led to profits jumping throughout the last financial year. With cost inflation easing and headwinds in the building industry easing, James Hardie Industries is poised for another strong year in 2024, with shares already up 2.16% YTD.

Lastly, as we kick off the new year, let’s look back the most traded stocks by Desktop Broker advisers in 2023. These included:

• BHP Group (ASX:BHP)
• CSL Limited (ASX:CSL)
• Telstra Group (ASX:TLS)
• Commonwealth Bank (ASX:CBA)
• Valguard Australian Shares ETF (ASX:VAS)

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