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2024 is lining up to be yet another great year for the global equities market as the MSCI World Index (MXWO) is up more than 20%. Since October 2022, the index is up a whopping 60% and the question is if there is further upside ahead or is it time to cash in?
Predicting the future of equities market is not an easy feat – something the past five years has taught us. It has been a period of filled with so called black swan events – occurrences one would almost never expect to happen. These range from the global pandemic to full scale war on the European continent. Despite all the negative headlines, the global equity market has proven resilient and has given patient investors fantastic returns. The US equity market, however, has been the main driver for global equity performance. In fact, over the last decade the US share of MXWO has risen from 54% to 76%. All of the 20 largest companies in MXWO are now American and the first non-US company is ranked number 23rd (Novo Nordisk).
American Exceptionalism
Many are talking about “American Exceptionalism” and, in the world of equities, it is certainly a real phenomenon given the US stock market’s dominance. Since the beginning of 2020, S&P 500 and Nasdaq 100 have returned 100% and 146%, respectively. During the same period, Eurostoxx 600 has returned 41%, Nikkei 225 76% and MSCI Emerging Markets a miserable 11%. Clearly, a lot of the U.S. outperformance is driven by the large US tech companies led by the Magnificent 7 (Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla). With the emergence of generative artificial intelligence as the most recent kicker, these companies have seen their combined market cap go up 200% during the last two years alone. As a result, these seven companies now account for over 30% of the S&P 500 index and the 10 largest companies make up 36% of the same index. These 10 US stocks represent more than a quarter of MXWO which the greatest concentration we have experienced in history.
All major regional markets have seen a rise in valuation during 2024. Not surprisingly, US is leading the way here as well. The 12-month forward PE for the US equity market is well above its previous 20-year high and mean. The same is true even if you exclude the big tech names. By comparison, Japan and Europe are trading in line with their 20-year mean whereas China is trading below that level. Given this backdrop, what should we expect from the global equities market in 2025?
The big picture for equities looks promising with the expectations of further central bank cuts, relatively low unemployment rates and a resilient global economy. A new Trump presidency combined with a Republican majority in Congress marks a regime change for both the global economy and markets. In the short run, we expect Trumponomics to have a positive impact on the US equities market with expectations of lower taxes and less regulation. This should be reflationary and trigger a broader recovery reaching smaller and medium sized companies as well as value and cyclical part of the stock market. Note that the Russell 2000 index (which makes up the smallest 2000 stocks in the Russell) has massively underperformed the S&P 500 index two years in a row and could see a significant rally next year. We also like US financials which is a key beneficiary of reduced regulation, as well as increased M&A and capital markets activity after a couple of years with below par activity. We see motivation from sellers – from ageing private equity portfolios, maturing venture capital pipelines, and higher valuation. Private equity is estimated to have $4 trillion in dry powder and corporate America has $7.5 trillion of cash on their balance sheets. The renewable sector has suffered greatly following the euphoria back in 2021. The WilderHill New Energy Global Innovation Index is off more than 60% since the peak reached in 2021 and took another hit after the US election. We think the sell-off offers some very interesting buying opportunities for long-term investors as both valuation and sentiment seem overly depressed.
The Wilderhill New Global Energy Innovation Index And Our Own Renewable Fund (DNB RE vs. index + MSCI World):
Source: Bloomberg data
The common worry about Trumponomics is inflation as the announced tariff increases and reduction in immigration are, all things being equal, inflationary. We do think, however, that the new Trump administration is well aware that Biden lost the election due to high inflation so we believe they will keep this in mind while implementing policy changes.
What about Europe?
The region trades at a record discount to the US – also when you adjust for the different composition. In fact, Europe has underperformed the US in eight of the last ten years, and year-to-date the underperformance is set to be the worst on record in dollar terms. It is no wonder that the sentiment among global investors towards the region is abysmal and that most are underweight. Even now, investors find it hard see the big upside given lackluster economic growth, weak Chinese demand, political instability and the risk of increased US tariffs. Further ECB cuts, a weaker euro and more market-friendly policies might be positive triggers for improved equity performance. An end to the war in Ukraine would also be a boost to European equities. We do like some of the global companies listed in Europe which trade at a significant discount to its US peers. Sector wise, the luxury stocks have recently done poorly given weak Chinese demand and a general growth slowdown post Covid-boom. However, we do see upside to the estimates given strong demand from the Middle East and from the US. Interesting to note; the US households’ net worth has increased by $10 trillion during the last year alone given the strong equity and housing market. Furthermore, some of the leading European technology and healthcare stocks look like good risk-reward to us. Both sectors should continue to benefit from further development of artificial intelligence.
Japan & Emerging Markets
We like the Japanese equity market which after a strong start to the year suffered from the carry trade unwind in early August and political turmoil this fall. The underlying growth story remains intact driven by domestic reflation, real wage growth, a weak yen, accelerating buy backs and ongoing corporate reforms. We particularly like the industrial sector as well as the ones with exposure to the domestic consumer.
It might be another challenging year for emerging markets as the prospects for a continued strong dollar is still our base case. Hence, we recommend investors to be selective. China still looks challenged as domestic demand remains anemic after the burst of the real estate bubble. The government stimulus has not yet proven impactful enough to boost domestic consumption. Furthermore, an intensified trade war with the US will not help the outlook. We still see India as a net beneficiary as global companies are de-risking their China exposure. We expect the Indian stock market to be supported by continued strong economic growth driven by a growing middle class, urbanization, business-friendly government and a young and highly educated workforce.
In sum
We don’t expect a third year in a row with 20%+ return for global equities but our base case is a more modest gain of 5-10% driven primarily by earnings growth. However, the range of outcomes seem particularly large this time given Trump’s new team and a republican majority in Congress. Hence, we think a diversified portfolio makes sense as we do see a broadening out of return where smaller companies, value and cyclicals should have potential to do well. Lastly, we expect a volatile market given a highly uncertain geopolitical backdrop and an unpredictable White House. We will be vigilant to act when opportunities arise.
Happy 2025 Investment Year!
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