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In focus: Earnings growth, market risks and the way forward
Corporate earnings are expected to grow globally in 2024 and 2025, staging a recovery from a dismal 2023. The optimism, aided by expectations of rate cuts by the US Federal Reserve (Fed), has helped the global equity market advance in recent months despite heightened volatility.
However, companies face a number of potential risks—such as uncertainties surrounding the US presidential election and geopolitical tension—that may yet impact their outlook. We continue to see opportunities in this environment but approach them selectively with attention to valuations and fundamentals.
Investment outlook
In North America, as we head into the last quarter of 2024, we view the US market as split into two buckets. The first contains cyclicals and market-sensitive names. After increasing exposure to stable or defensive companies before the recent rally, we are now likely to incrementally deploy capital to beaten-up cyclicals that are already discounting some kind of economic slowdown. Auto components look favorable on valuations, but they also carry the highest risk. US banks offer compelling value, in our view, as earnings accelerate, regulation uncertainty ends, and interest-rate cuts lower funding costs.
In Asia Pacific, equities in China and Hong Kong rose on a major rally in late September, as the Chinese government rolled out its most substantial policy support package to boost growth since the COVID-19 pandemic. The breadth of the measures—with consecutive announcements encompassing policy and mortgage rate cuts as well as stock market support—was somewhat unexpected. A pro-growth Politburo, which pledged to deploy fiscal spending to support consumption and the real estate market, further aided sentiment.
In Europe, equities are the subject of some uncertainty heading into the fourth quarter of 2024, largely due to weak economic indicators and depressed sentiment. Macroeconomic headwinds are among the challenges confronting European equities. These include weak economic growth, particularly in key economies like Germany, where industrial activity has stagnated and business confidence has softened. Additionally, ongoing geopolitical risks, such as the war in Ukraine and global trade disruptions, present significant uncertainties. Eurozone earnings may prove vulnerable going forward, and the longer negative sentiment persists, the more cautious consumers may become on the spending side.
Market review: September 2024
Global equities collectively rose in September 2024. As measured by MSCI indexes in US-dollar terms, emerging market equities substantially outperformed the global MSCI ACWI benchmark, while developed market and frontier market equities underperformed it. In terms of investment style, global growth stocks modestly outpaced global value stocks.
The global market overcame heightened volatility early in the month, as resilient economic reports and a continued disinflation trend in the United States reignited hopes for an economic soft landing. Interest-rate cuts by the US Federal Reserve, the European Central Bank and other major central banks further bolstered equities worldwide. Notably, Asian stocks benefited from the People’s Bank of China’s implementation of significant monetary stimulus in an effort to boost China’s economic growth.
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.
Diversification does not guarantee a profit or protect against a loss.