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Weekly Market Analysis - Asked and Answered: What’s Next for Global Equities? What About Tech?
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Returns May Broaden in This Environment
More than 75% of global equity markets are trading above their 200-day moving average. Broadening of equity performance is occurring beyond the US. Global inflation is falling, and central banks are poised to dial back tight monetary policy. This will mean a stronger world economy in 2025. Forward-looking equity investors should consider that returns may be earned more broadly across the world in such an environment.
Tech Remains Relevant
It is not too late to consider tech. In fact, technology should remain a cornerstone of suitable investor portfolios. Plenty of tech stocks have lagged high-flying mega caps since the start of 2023. For long term investors, we see virtue in semiconductor manufacturers, robotics and select software players.
Markets in a Sweet Spot but the Pace of Appreciation May Slow
The combination of lower policy interest rates, slowing inflation, uninterrupted economic growth and rising corporate profits is as close to an ideal setting for financial markets.
As this data and policy became clear, global equity markets rallied without a setback for the past five months. Looking forward, they may still benefit from the mere confirmation of this forecast path but will likely appreciate at a slower pace unless there are further positive surprises.
Summary
Given the performance of US equities over the past 15 years and the strength of the dollar, US investors wonder whether there is value in international diversification. Many non-US investors who have built US portfolios feel similarly. For the most part, we think US firms have earned most of the premium in valuation that has arisen over the past decade (see chart below). But that is not a forward-looking view.
The strongest performing asset class or region in each decade is rarely the same one. While investors can choose a home-biased portfolio, our preference is to continue seeking strong risk-adjusted returns globally with the value of diversification in mind.
For now, more than 75% of global equity markets are trading above their 200-day moving average. Broadening of equity performance is occurring beyond the US. Global inflation is falling, and central banks are poised to dial back tight monetary policy. This will mean a stronger world economy in 2025. Forward-looking equity investors should consider that returns may be earned more broadly across the world in such an environment.
Portfolio considerations
Our focus is to identify growth opportunities and associated risks across the world. We ask investors to consider a global view, keeping in mind the value of diversification. US shares cannot outgrow the rest of the world by a much larger margin than in the past. Separately, we still believe tech should remain a cornerstone of portfolios for suitable investors. In a global economy increasingly propelled by technological innovation, we believe investors should seek exposure to technology in their portfolios. In particular, Artificial Intelligence (AI) linked thematic plays in the semiconductor space, robotics, and select software plays are timely.
Source: Bloomberg and FactSet, March 26, 2024. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Returns May Broaden in This Equities Environment
Given the performance of US equities over the past 15 years and the strength of the dollar, US investors wonder whether there is value in international diversification. Many non-US investors who have built US portfolios feel similarly. For the most part, we think US firms have earned most of the premium in valuation that has arisen over the past decade. A “bottoms-up” approach to asset allocation in a global portfolio leaves us overweight US equity sectors by 5.5% compared to a -3.5% position for non-US shares today. As we described the September Quadrant, fast growing companies outside the US are doing well, but there are fewer of them.
If you simply extrapolate past performance into the future, some trends become unsustainable. Looking at data since 1970, US equities have never been a larger share of the world equity market as measured in US dollars. US Equities have risen from about 40% of world equity market cap in 2010 to 65% today. But to repeat the outperformance of US shares, domestic markets would have to rise to 90% of the world equity market in the next 15 years. This seems highly unlikely
Tech Remains Relevant
Last year, the “Magnificent 7” propelled the Nasdaq 100 to a 55% return. This year, with the tech momentum trade shifting to AI Infrastructure, the Philadelphia Semiconductor Index (SOX) has surged nearly 17% in three months. Many investors are left wondering if it is too late to buy tech. In a global economy that is increasingly propelled by technological innovation, we believe investors should seek to keep tech exposure in their portfolio. And there is still value to be found in tech on a relative basis.
Plenty of tech stocks have lagged the high-flying mega caps since the start of 2023. We think investors are beginning to dig deeper to find AI winners among medium and small companies. The AI boom is also coinciding with a rebound in the “traditional” technology cycle. We see clear signs of a bottoming in demand for basic chips that go into PCs, smartphones, and industrial machinery. While recent market momentum has favored anything tied to AI, a durable recovery in everyday electronics demand should also be supportive for small and mid-sized tech firms who are vital parts of complex supply chains.
Small and medium-sized tech companies and especially those with an AI focus, present a potential opportunity for buy-and-hold investors. When it comes to AI, we believe investors should focus specifically on three thematic areas:
- Semiconductor equipment: While global semiconductor equipment stocks have rallied 29% this year, they have still lagged the world’s leading chipmaker by 53%. Leading fabs in Taiwan and equipment players in Europe, Japan, and the US continue to point to full order books out several years.
- Select software players with strong moats and lots of data: As AI models get trained and deployed, we will see beneficiaries among leading software names who most effectively integrate AI into their existing products. But selectivity will be key in areas of software like cyber security, fintech, and SaaS where competition is heating up.
- Robotics and tech hardware: The key difference between the engines that power chatbots and robots is the input data. AI-powered chatbots digest lots of text while robots analyze data from cameras or sensors. As AI chips become more powerful and available at scale, sellers of industrial robots and automated driving software will soon be able to complete complex, human-like tasks. These advancements have the potential to revolutionize manufacturing and drive a surge in productivity as our commutes suddenly become “work time.”
Markets in a Sweet Spot but the Pace of Appreciation May Slow
The big news at the Fed’s March meeting was that it expects an uninterrupted economic expansion through 2026 as inflation normalizes. And even as the expansion continues, it expects to move the Fed funds rate from today’s near 5.4% level to 3.1% over the same time.
As mentioned, this combination of lower policy interest rates, slowing inflation, uninterrupted economic growth and rising corporate profits is as close to an ideal setting for financial markets. Looking forward, we believe headline inflation measures will fall further over the course of 2024. Confidence in a lasting economic recovery may gain further traction with it. However, it is seeming less likely that the Fed will achieve its 2% inflation target in the coming ten years as it was in the post 2010 decade.
