This month:
Expert investment views:
The case is made for a corporate earnings contraction and more attractive equities valuations, but with the caveat that we’re not there yet
Equities investors are urged to dig deeper into the Artificial Intelligence boom, and to consider China and Hong Kong for significant upside potential
Broadly, investors are urged to look towards Asia and Emerging Markets, although they should brace for a bumpy ride
Featuring this month’s experts:
1. Are we nearly there?
Insights from:
Our central view is therefore that higher interest rates and quantitative tightening will lead to higher unemployment, faltering economic growth and moderating inflation (especially in the US), and ultimately an earnings contraction Our central view is therefore that higher interest rates and quantitative tightening will lead to higher unemployment, faltering economic growth and moderating inflation (especially in the US), and ultimately an earnings contraction. There are many companies we would like to buy but valuations are not yet attractive. Therefore, we remain underweight equities for now as we await a recession that may take longer to materialise. So, if you are asked the inevitable question by young children on a long car journey this summer, the answer will likely be similar to our current views on markets: not quite yet!
Rosie Bullard
Portfolio Manager at James Hambro & Partners
2. Investors turn to AI and Asia
Insights from:
Investors have turned their attention to Artificial Intelligence (AI) and economic/earnings resilience, which saw markets climb the wall of worry. The NASDAQ, dominated by US tech companies, stood out with a 13% increase in Q2, driven by the excitement surrounding AI ventures. A few tech stocks were responsible for the majority of the S&P 500’s growth during this period. This concentrated rally in the US demonstrated how an emerging mega trend like AI can propel markets upward, even in an uncertain macroeconomic environment.
The key question moving forward is whether AI will contribute to overall market earnings growth. While AI has tremendous productivity potential over the longer run, valuations for its darlings seem stretched. Therefore, we continue to advocate for a selective approach of quality companies that can display long-term compounding of earnings.
The key question moving forward is whether AI will contribute to overall market earnings growth. While AI has tremendous productivity potential over the longer run, valuations for its darlings seem stretched
Asia, meanwhile, offers several interesting investment stories. The Bank of Japan has maintained its loose monetary policy and the resulting further weakening of the yen. Taken together with a stronger-than-expected economy and cheap underlying relative stock valuations, this has driven Japanese equities higher. The trend is further supported by investors wanting to diversify away from China, albeit remaining invested in Asia.
While other central banks around the world have been delivering hawkish surprises, China’s central bank enacted 0.1% rate cuts off the back of a loss of momentum. While the authorities talk about stimulus to boost growth prospects, equity markets in China and Hong Kong were down over the quarter. Given current valuations, the upside surprise of any action to boost growth could be significant.
Sanjay Rijhsinghani
Chief Investment Officer at LGT Wealth Management
Top Tip
Lee Goggin
Co-Founder
3. A bumpy ride ahead
Insights from:
Asia and Emerging Market (EM) equities have disappointed this year. Rather than outperforming as many had expected, they have underperformed in the face of a renewed burst of strong performance from the US. We believe now is not the time to lose faith in Asia/EM for three main reasons.
The first is valuation. Asia/EM have for good reason always been and will almost certainly remain considerably cheaper than the US. But they now look excessively cheap, trading at a P/E discount to the US of as much as 30-35%. China is particularly cheap on a P/E ratio of only 10.2x, almost 50% lower than the 19.7 of the US.
The second is growth. Cheapness is rarely on its own enough to drive outperformance but growth trends currently also very much favour Asia/EM. Even though the post-covid rebound in China has not been as strong as hoped, the authorities are easing policy and the regions still looks certain to see a pick-up in growth. This contrasts with the US where the economy looks set to slow further with the Fed still not finished tightening policy and a dip into recession is quite possible.
Cheapness is rarely on its own enough to drive outperformance but growth trends currently also very much favour Asia/EM. Even though the post-covid rebound in China has not been as strong as hoped, the authorities are easing policy and the regions still looks certain to see a pick-up in growth
Third, there is the US dollar. Past outperformance of the US versus Asia/EM has been closely linked to the strength of the dollar. But like US equities, it now looks very overvalued and should weaken over the medium term.
Geopolitical tensions between the US and China are one reason why the Asia/EM trade has not worked out recently and they look here to stay. But it is not in the interest of either side to let relations deteriorate too much. Rather than prevent Asia/EM outperforming over the next year or two, it just means it is likely to be a bumpy ride.
Rupert Thompson
Chief Economist at Kingswood Group
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
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