Broader investment opportunities likely in the second half of 2024
Successfully navigating the road ahead will require robust fundamental research and a focus on bottom-up stock picking
DISCUSSIONS on the current global stock market frequently revolve around three key themes – breadth, depth, and concentration. We believe the market presents investors with an expanded opportunity set including more companies and sectors than in recent times.
A closer analysis of global market returns in 2024 reveals a significant trend towards broadening out, in stark contrast to last year, when the market rally was mainly driven by the Magnificent Seven stocks (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia, and Tesla).
We also find attractive opportunities in Asian stock markets, such as Japan and South Korea, further enhancing the potential for diversified and rewarding bottom-up stock selection.
Beyond the Magnificent Seven
The performance of global markets this year has been largely driven by the themes of artificial intelligence (AI) and central bank policy, trends that are likely to continue. Indeed, record-high US stocks have triggered investor concerns over valuations.
However, we also need to view valuations in the context of earnings and returns. The Magnificent Seven companies are expensive relative to the market, but they also deliver higher returns, which could justify their valuations.
Although market concentration with the seven stocks is unprecedented, performance within the group has diverged. Nvidia, Meta, Alphabet, Microsoft, and Amazon outpaced the market, while Apple and Tesla lagged.
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Given that the benefits of AI technology are not evenly distributed among the seven, further dispersion within the group is expected.
Moreover, returns this year have not been exclusively dependent on the seven companies. While approximately 40 per cent of global stock returns are attributable to them so far this year, the semiconductor sub-industry, encompassing companies beyond large-cap technology, has accounted for over a third of total market returns.
This indicates that returns are not exclusively dependent on mega-cap tech stocks, and markets offer greater breadth and depth than may be initially apparent.
AI more than just technology
The rise of AI is a significant driver of the broadening of global stock markets, particularly in relation to generative AI propelled by Nvidia and the entire semiconductor industry. The speed of adoption is remarkable, underscoring the strong demand for AI.
For example, ChatGPT amassed 200 million active users in less than two months, whereas YouTube took 47 months to reach 100 million users. The rapid adoption of new applications and products suggests that corporates are unlocking both revenue generation and cost savings potential.
A Bank of America survey suggests that 60 per cent of use cases are geared towards enhancing operational efficiency and reducing costs.
We expect the trend of rapid AI adoption to maintain its momentum in the medium term, as companies continue to examine how it can positively impact profitability.
The development of AI has driven the performance of not only technology companies but also multiple sectors and industries. Indeed, investments in AI, semiconductors and technology transcend sector boundaries.
Given the energy-intensive nature of AI development, the proliferation of data centres and associated infrastructure has led to increased power consumption and demand for materials like copper and wiring.
Year to date, companies involved in providing hardware and materials for data centres have outperformed the Magnificent Seven stocks and the semiconductor sector.
This underscores the broadening nature of the market and suggests investment opportunities beyond the dominant players.
Potential of value stocks
It is also important to examine the performance of different factors and styles. While there is a perception that growth stocks have dominated the market, a comparison of the performance of different styles shows a greater dispersion and differences.
In 2023, value stocks in the European and Japanese markets performed as well as growth stocks, and this trend has continued.
International (ex-US) stocks continue to be attractively valued and are appealing in the post-Covid era, due to their higher exposure to value-oriented sectors like financials, materials, industrials, and energy, which we anticipate will receive sustained support in the coming years. Accommodative central bank policies in these markets may also help support risk assets.
Non-US stocks are attractive
The market is also broadening beyond the US. The relative valuation of the MSCI All Country World Index (ex-US) compared to the MSCI US Index has been on a downward trend since the global financial crisis.
Nevertheless, this year has seen a resurgence in the performance and estimated earnings growth of international markets relative to the US. Countries such as Japan, India and Vietnam are expected to show significant performance due to their earnings growth trajectory and relatively attractive valuations.
We continue to favour Japan as improved corporate governance standards continue to have a tangible and substantial impact on company performance.
These positive developments are reflected in higher multiples. Given Japan’s significant role in areas such as the AI semiconductor chain, we believe this trend is well positioned to continue.
South Korea is following Japan’s footsteps in boosting stock valuations through corporate governance improvements. India continues to be a beneficiary of international investments as supply chains are diversified. India’s recent election result suggests a renewed focus on growth and consumption-oriented policies.
Vietnamese stocks also look cheap against the backdrop of an expanding consumer economy and looming upgrade to emerging market status.
The global stock market presents a broadening opportunity set for investors. Secular themes such as AI are expected to continue to drive performance, while certain Asian markets show promising signs of fundamental improvement.
Divergences across sectors and countries should be expected, and successfully navigating the road ahead will require robust fundamental research and a focus on bottom-up stock picking.
The writer is global equity portfolio specialist, T Rowe Price
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