Global Equities
The outlook for US equities suggests continued optimism around tech and AI investment with the potential for a broader economic recovery, and sector shifts favouring growth stocks over defensives, being tempered by concerns about inflation and political risks. There are early signs that earnings growth has accelerated due to macroeconomic growth remaining resilient, but broader participation is required for this trend to be sustained. This needs to be monitored closely for share and sector stock-picking opportunities.
Valuations suggest the S&P 500 is still in expensive territory, with forward PE ratios more than one and a half standard deviations above their 30-year average, amid the highest market concentration in top equities since 2000. There are early signs that the US market rally is broadening out, however, and we await further confirmation to increase our confidence.
The ECB cut its deposit rate by 25bps in September and the ECB press conference and economic forecasts all confirm the ECB remains on a path of gradual rate normalisation with quarterly 25bps cuts. Valuations remain at a discount in absolute and relative terms vs the US and broader global equities, but questions remain whether this is justified by weak fundamentals, thus, we are looking for signs that earnings have indeed stabilised. Technical analysis is more positive in absolute terms, yet recent price action continues to favour US, Global and Asia/EM shares.
Japanese data indicates that the economy remains on track for an above-trend 2% or so expansion this quarter, while sentiment data has been mixed, with the services sector continuing to suggest resilience with domestic demand firming, while manufacturing is more downbeat with unfavourable weather and sluggish China related demand depressing activity. This divergence highlights a two-speed economy, with growth increasingly driven by domestic demand supported by rising wages rather than as a function of the external cycle. Earnings have been resilient, with exporters boosted by a weaker yen, while domestic companies have benefited from robust consumption supported by government stimulus and stable wage growth.
Valuations are lower when compared to longer-term averages, and on a relative basis, Japan is mixed when compared to US, Europe and Asia. Japan is working through a consolidation phase after a strong equity run. Absolute price action over the last six months has reached a critical threshold where a decisive break out may occur opening the next leg higher. Failure to break out could see a fall back to the bottom of its current consolidation channel.
Falling energy prices and the Fed easing policy rates is a favourable combination for many Emerging Market central banks, but the rate sensitivity of these developments will vary per country. The response will likely be the greatest in EM Asia, where easing food and energy prices have already returned inflation to central bank inflation targets.
Valuations reveal emerging markets are historically undervalued, with regional disparities offering varied investment opportunities, particularly as supply chains realign. China, one of the biggest drivers of EM activity, remains cheap in both absolute and relative terms even after the recent bounce. Technicals remain positive across EMs and relative performance is strong in EM Asia. Flow data continues to suggest a turnaround in positive flows towards Asia following the recent China stimulus announcements.