srclogistic.com.

Schroder portfolio manager Simon Webber noted that in August 2024, financial market adjustments led to a downward revision of stock valuations, reflecting the uncertainty surrounding the U.S. economic outlook.

However, due to strong corporate earnings growth and the prospect of a more accommodative monetary policy, stocks quickly recouped their losses.

After experiencing a very strong nine months, the stock market is more susceptible to adjustments, but corporate fundamentals remain solid, and increased volatility can provide opportunities for reconfiguration when financial markets experience mispricing.

Regarding the potential returns and risks of global equity investment, Simon Webber stated that, first, according to common indicators, despite its long history, the UK remains one of the most attractively valued markets globally.

Advertisement

In global equity markets, stock valuations outside the U.S. are more attractive, especially in the UK, Japan, and emerging markets.

However, the valuation levels of the U.S. stock market do not seem too high, except for the ultra-large "tech giants" growth stocks (which are driving up the overall price-to-earnings (P/E) ratio of the S&P 500 index).

Overall, tech giant stocks benefit from investment opportunities related to relevant themes and strong fundamentals.

In contrast, other industries in the financial markets have been struggling in an operating environment that remains challenging, which has largely suppressed the growth of revenue and profits.

Second, over the past year, the financial market width has been at an extremely low level due to a small number of stocks causing the vast majority of the stock market's gains.

Currently, there is a general expectation in the financial markets that this gap will narrow, with an anticipated acceleration in overall financial market earnings growth and a significant slowdown in the earnings growth of tech giants.

Over the past 18 months, the earnings growth of U.S. ultra-large tech companies has been very strong, driven by a new round of cost control and continued revenue growth.

Overall, these companies still have excellent businesses and strong fundamentals, but they are more susceptible to downside risks in revenue and profit performance compared to other companies.

From a regional perspective, stock market returns are also expected to broaden.

The European economy will be more affected by interest rate cuts than the U.S. economy, and Japan's real wages have turned positive after several months of contraction.

Interest rate cuts will provide further support to these regions.

In particular, European consumers hold a higher proportion of variable-rate mortgages (compared to the U.S.) and businesses are more dependent on bank loans.

In contrast, the U.S. financial market discussion has shifted from controlling inflation to avoiding a recession.

Although a U.S. economic recession is not our base case, some regions may catch up.

Third, the trend of improving corporate earnings in Japan has been underestimated, which will continue to support the Japanese stock market.

Currently, the Tokyo Stock Exchange and various government agencies are continuing to implement reforms aimed at improving corporate governance and capital efficiency.

These measures should help to use excess funds more effectively and increase the extremely low stock ownership rate relative to other developed markets.

As a result, the financial market is more focused on shareholder returns and increasing investment and capital expenditure.

The increasingly normal inflation environment has also prompted the Bank of Japan to change its policy on yield curve control when most central banks globally are leaning towards easing monetary policy, which further drives companies to refocus on productivity and profitability.

Schroder believes that this will provide greater support for the yen, which has eroded the returns of foreign investors due to depreciation over most of the past decade.

Therefore, companies focused on the domestic Japanese market are expected to present more attractive opportunities.

Fourth, the U.S. presidential election in November remains one of the most closely watched events, and its outcome could have a significant impact on geopolitical relations.

Overall, Democratic and Republican candidates have not yet disclosed their policies and policy differences in key areas, and further clarification of policies may increase rather than decrease short-term volatility.

Nevertheless, in areas of clear disagreement such as trade tariffs, energy policy, bank deregulation, and drug pricing, Schroder believes the impact will be evident.

Regardless of the election outcome, Schroder expects trade policy to readjust the relationship between the U.S. and its competitors, avoiding competitors and prioritizing the enhancement of the U.S.'s leadership position in the high-tech industry.

Fifth, the hype around generative artificial intelligence has been a major driver of stock price growth in the financial markets over the past year.

Investors have flocked to beneficiaries of the technology industry, including sectors such as semiconductors and data centers.

However, the revenue generated by artificial intelligence is less than one-tenth of the amount currently spent.

As a result, the financial market is skeptical about whether there will be enough future earnings to justify the current level of infrastructure construction.

Generative artificial intelligence is still in its early stages, and the development of this technology has tremendous potential to change business and productivity.

However, it currently faces stricter scrutiny in terms of power consumption, supply constraints, and the speed of revenue growth.

There are also questions raised about whether there is an oversupply of related construction in the market, which could lead to a consolidation phase for artificial intelligence infrastructure-related stocks.