Will the ugly ducklings of 2023 become the swans of 2024?

The adjustment to higher interest rates has been painful, just ask anyone who has had to remortgage in 2023. However, increasingly it appears that those rate rises are drawing to a close, with central bankers satisfied that they have done enough to calm inflation. For those sectors hit hard by rising rates, there may be light at the end of the tunnel. It could be time for investors to look again at a few of these unloved areas of the market.

Markets may still be debating when and if interest rates will be cut in 2024, but the broad consensus is that the rate rising cycle is over. This is even true in markets such as the UK, where inflation remains well ahead of its target. While there are risks, such as rising oil prices, central bankers recognise that more rate rises could trigger a recession.

Certain sectors have been hit very hard by rising rates. These were often sectors that had served investors heroically in recent years – infrastructure or private equity, for example. Not all will bounce back as hard as they fell, but some look ripe for a reappraisal in light of the stabilisation of interest rates.

Commercial property

The commercial property sector is a case in point. It has been a tough place to invest with high interest rates putting pressure on valuations. In some cases, there have been other factors at work. The office sector, for example, is still in a state of flux. While employees are slowly returning to the office, companies are still evaluating the space they need. It is also difficult to make a strong case for high street retail. Even though prices have fallen a long way, there is no likely reversal in the inexorable move to e-commerce.

However, there are areas of the market where demand remains strong, valuations are stabilising, and a revival could be imminent. Logistics warehouses, for example, are still in high demand, supported by the shift to e-commerce, plus the post-pandemic trend to move supply chains closer to home. Areas such as care homes or student accommodation have captive demand. Equally, high quality, environmentally-sound buildings in top locations have their pick of tenants and can push through rent rises.

CT European Real Estate Securities manager Marcus Phayre-Mudge, says in a recent update: “Those sectors with genuine market demand and limited supply remain our focus: logistics, multi-let industrial, student accommodation and retail remain key sub-sectors, accessed via companies with appropriate leverage.” The fund’s pan-European footprint gives it exposure to a range of markets.

Although Phayre-Mudge admits that lower quality offices and older buildings - requiring significant capital expenditure to meet environmental standards - will continue to struggle, he sees a brighter future ahead.


Until recently infrastructure had been a poster-child for calm and stability. Funds focused on this area have delivered a steady, rising income - as well as capital growth - and proved a safe haven amid the turmoil of 2022. However, more recently, their safety has been their undoing.

During the decade-long era of low interest rates, investors had to hunt round for areas that provided a high and growing income. Infrastructure assets, with their government-backed, inflation-linked revenue streams provided a natural option. The problem is that when the interest rate environment changed, many investors returned to fixed income assets, selling out of infrastructure in spite of its sparkling credentials.

However, infrastructure, by and large, hadn’t changed. It continues to deliver the same reliable cash flows; its asset base is stable and its prospects sound. While fixed income is vulnerable to inflation, infrastructure assets will usually have inflation-linked increases built into their revenue courtesy of regulation, concession agreements or contracts

There is still a drive to invest in new infrastructure across the world. In 2021, the US government assigned $1 trillion in its Bipartisan Infrastructure bill* to build out new infrastructure across the country. This is increasing the opportunity set for infrastructure assets all the time.

One fund to consider is M&G Global Listed Infrastructure, which invests in the shares of infrastructure companies across the world. This includes a diversified blend of ‘traditional’ economic infrastructure assets (utilities, energy and transport), plus social infrastructure (health, education) and growth opportunities in evolving infrastructure (communications and royalties). Another to look at would be First Sentier Global Listed Infrastructure, a global portfolio of around 40 names.

Infrastructure has been ploughing on, doing what it does, but has been blown about by the noise of markets. If interest rate rises are at an end, infrastructure assets may be worth a closer look for those wanting to diversify their income streams.

Growth assets

The valuation of stock markets is sensitive to interest rate fluctuations, making assets poised for future growth vulnerable when rates rise. This dynamic has had broad implications. For example, fund managers who specifically focus on growth strategies, such as Baillie Gifford, have felt the impact. Additionally, segments of the stock market known for more rapid growth, such as smaller companies, have also been affected.

Even with rates stabilising, the economic environment is not as forgiving for this type of high growth business as it has been for the past decade. Capital will not be readily available to support fast-growing companies and there will be casualties. However, the baby has often been thrown out with the bath water and there are great companies trading at low valuations.

For investors that believe the tide might be turning, Baillie Gifford Global Discovery invests in ambitious companies looking to solve important, intractable problems. These are often smaller, more nimble companies. It has been hit hard by the current environment with many of its portfolio holdings falling significantly out of favour (the fund is down 17%** in the past 12 months alone).

Nevertheless, its portfolio taps into a vast range of exciting markets – including digital technologies, AI and innovative healthcare companies and could turn quickly if sentiment shifts. It’s a long-term option, but manager Doug Brodie is a veteran investor in innovative companies who has shown his process works over the long-term.

*Source: New York Times, August 2021
**Source: FE fundinfo, 18 October 2022 to 18 Oct 2023

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

Published on 20/10/2023