Positioning for a Q4 2024 bull run in equities

Into the last quarter of 2024, Nomura International Wealth Management maintains a bullish outlook on equities, supported by a convergence of highly favorable macroeconomic factors.

Monetary policy easing from the Federal Reserve: The world’s most influential central bank is at the forefront of monetary policy easing, moving ahead of the market’s already aggressive expectations. Despite equity markets hovering near record highs, the Fed’s proactive stance signals a strong commitment to sustaining economic momentum. This pre-emptive easing not only underpins liquidity but also lowers borrowing costs, fostering an environment conducive to risk assets. Historically, such a policy stance has been a catalyst for equity market rallies as lower rates enhance corporate profitability and investor sentiment.

Comprehensive stimulus from China: The world’s second-largest economy is simultaneously deploying a broad array of stimulus measures, ranging from fiscal boosts to monetary accommodations. This comes despite forecasts already projecting stronger global growth this year compared to last. These measures are expected to support both domestic and global demand, benefiting a wide range of industries and markets. Sectors tied to commodities, technology, and manufacturing stand to gain significantly from renewed Chinese demand and investment.

While we are bullish on global equities at the start of Q4, we recognize the heightened uncertainty and potential risks in the mid to latter part of Q4 2024 and into 2025. Geopolitical tensions, recession threats, ongoing monetary policy uncertainty, inflations perils and the upcoming US elections introduce tail risks that could alter the investment landscape. A flexible approach, underpinned by active portfolio management and vigilant monitoring of macroeconomic signals, will be crucial in navigating these complexities. Our strategy emphasizes the importance of staying nimble, active and invested.

US Equities - The Dominance Dilemma

One thing is clear: the control centre for equities firmly resides in the US, with US equities making up nearly 50% of global stock market value.

The US enjoyed a similar dominance in the 1970s, but today’s drivers are starkly different. Back then, oil, auto, and industrial giants ruled the roost. Today’s play is all technology, with the so-called Magnificent 7 driving the market.

When markets become too reliant on a handful of companies or sectors, the risk of a sharp correction grows. While US market dominance is supported by strong earnings, high profitability, and superior returns on capital, it has also become expensive. US equities are now trading at a premium relative to the rest of the world, even after adjusting for sectoral differences.

The good news is that investors don’t have to sit back and let US dominance define their portfolios. There’s no harm – and potentially plenty of gains – in spreading the bets.

Geographical Diversification: Japan, for instance, is ripe for a restructuring play. Meanwhile, emerging markets like India for growth and China for value offer fresh opportunities that might just be the antidote to US overexposure.

Sectoral Diversification: The rise of the technology sector, especially in the US, has been unstoppable, but investors can hedge by diversifying into cheaper growth sectors. Healthcare, for instance, presents solid growth prospects, especially as AI begins to transform the industry.

Stock Diversification: It’s not just about the Magnificent 7. Europe has its own set of dominant players, the GRANOLAS, a group of large-cap companies with high reinvestment rates, solid balance sheets, and lower valuations compared to their US counterparts.

Fundamentals and Momentum in Sector Selection

In today’s highly volatile market, effective stock selection requires balancing fundamentals with momentum. Fundamentals such as revenue growth and profitability underpin a stock’s long-term value, while momentum, reflected in earnings revisions, indicates short-term performance and market sentiment. Identifying sectors that offer strong fundamentals and positive momentum is key to portfolio gains.

Energy (US, Japan, and Europe): With energy prices remaining high and long-term demand for cleaner energy sources rising, the energy sector in the US, Japan and Europe remains particularly appealing, driven by a combination of solid earnings momentum and favorable valuations. Key drivers include:

Energy transition: Europe and Japan are accelerating their shift toward renewable energy, supported by government initiatives and long-term sustainability goals. In the US, the energy sector benefits from a balanced approach, with both traditional fossil fuels and renewable investments contributing to growth.

Supply constraints: Geopolitical tensions, especially in Europe due to the Russia-Ukraine conflict, continue to disrupt global energy supplies, driving up prices and boosting profitability for energy companies.

Consumer Staples (Japan, Europe, and China): While recent government stimulus efforts have provided additional support for staples companies in China, stable consumption patterns and resilient business models in Japan and Europe continue to offer attractive value.

Resilience to economic cycles: Staples companies provide essential goods that are less sensitive to economic downturns, offering a level of defense that appeals to investors in uncertain times.

Pricing power: Companies in this sector are able to pass on rising input costs to consumers, thereby maintaining margins even when inflationary pressures rise.

Consumer Discretionary (China and Japan): There’s a strong investment case to be made for the consumer discretionary sector in China and Japan, where a combination of government support and improving economic fundamentals is driving earnings momentum:

Government stimulus in China: China’s government has implemented a fiscal stimulus program aimed at boosting domestic consumption, providing a tailwind for discretionary companies. This fiscal support has helped revive spending across a range of discretionary goods, from luxury products to travel and entertainment.

Economic resilience in Japan: Japan’s discretionary sector is benefiting from improving consumer confidence, wage growth, and government policies aimed at stimulating consumption, creating a favorable environment for revenue growth.

With the right mix of geographical, sectoral, and stock diversification, investors can enjoy the rewards of the current market leaders while positioning for the next wave of growth.