Global Equity Pulse

Preview

In focus: The case for Japanese equities

Japanese equities have been extending their rally, handily outperforming the global markets since the turn of the year. In the year to date as of February 29, 2024, the Nikkei 225 Index has risen 17%, breaching the all-time high recorded 34 years ago. A broader benchmark, TOPIX, similarly surged 13% over the same period, almost touching its all-time high. In comparison, the US benchmark S&P 500 Index rose almost 7% year-to-date, while the global benchmark MSCI All Country World Index rose almost 5%.¹

For Templeton Global Equity Group, Japan remains a high-conviction market in 2024 as we believe corporate governance reforms continue to underpin prospects of enhanced shareholder returns; a normalizing domestic economy after three decades of deflation may prove supportive as well. However, valuations and earnings growth bear watching.

Investment outlook

In the United States, optimism about rate cuts currently dominates sentiment, but we will pay attention to capital costs and their impact on corporate fundamentals, including earnings and cash flow growth. Likewise, amid the market recovery in the Asia Pacific (APAC) region, we strive to gear our portfolios toward companies that are favorably valued relative to their future earnings power, while diversification remains a key investment priority. In Europe, we like the small- and mid-cap segment following a period of underperformance relative to the big caps. The United Kingdom is one of the markets where we see relevant opportunities.

Looking ahead, we aim to keep our portfolios generally balanced across a range of factor and style exposures, as we continue to navigate a stock-picker’s market. As always, valuation discipline and bottom-up fundamental analysis will anchor our investment decisions, but we will adopt a nuanced approach to different regions to identify their most attractive opportunities, in our view.

Market review: February 2024

Global equities rallied in February 2024. As measured by MSCI indexes in US-dollar terms, emerging market equities modestly outperformed a global index, while developed market equities slightly lagged it, and frontier market equities significantly underperformed it. Global growth stocks substantially outperformed global value stocks.

In February, generally strong fourth-quarter 2023 corporate earnings reports, enthusiasm about artificial intelligence and the potential for an economic soft landing in certain regions bolstered investor sentiment. However, expectations about interest-rate cuts in the United States and Europe diminished amid hawkish comments from the US Federal Reserve and the European Central Bank.

Endnote

Source: Bloomberg. As of February 29, 2024. The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The TOPIX is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The S&P 500 includes 500 leading companies and captures approximately 80% coverage of available market capitalization in the United States. The MSCI All Country World Index captures large- and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Active management does not ensure gains or protect against market declines.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.

There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.

Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.

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