MARKET SNAPSHOTS
US continues to maintain its outperformance over World equities, underscoring our earlier constructive stance on US equities.
The Stoxx Europe 600 continued its early-year momentum to hit record highs in May 2024. DAX, CAC 40 and the UK FTSE 100 indices all achieved new highs, benefiting from a rotation into value stocks.
In Asia, Hong Kong stock market staged a powerful rally since mid-April, driven by the most comprehensive easing of property policies since the introduction of “three red lines” in August 2020.
Japanese equities have continued to deliver solid gains year to date, driven by multiple tailwinds which include an ongoing economic recovery, weak JPY, improving corporate governance and re-opening tailwinds.
HK / China: Rising Tide
A swift turnaround of China property policies has reset expectations for higher economic growth. China’s 3rd Plenum in July may release new catalysts.
Hong Kong stock market staged a powerful rally since mid-April, driven by the most comprehensive easing of property policies since the introduction of “three red lines” in August 2020.
The pivotal change unfolded quickly, which delivered a clear signal that government is eager to lift the property market from a downward spiral.
Although Hang Seng Index rebounded as much as 21% since 19 April 2024, valuation remains cheap at less than 10 times forward price-to-earnings multiple (see Chart 1).
Looking ahead, the 20th Central Committee of Chinese Communist Party will hold the 3rd Plenum in July 2024. The top leaders are expected to lay out the strategic plan for deepening market reform and Chinese-style modernisation.
The swift turnaround of property policies appears to be the inflection point that we have long awaited. Expectations for more stimulus and market-friendly policies are likely to build up in the run-up to the 3rd Plenum in July 2024, in our opinion.
High-beta large-cap stocks are bound to catch more attention should institutional investors continue reloading their portfolios. Net fund flow and volatility tend to play bigger roles than individual companies’ fundamentals in the short-term when market sentiment reverses.
Notable Developments in Selected Sectors
High-beta index constituents - Internet companies, new energy vehicle makers, non-bank financials and sportswear makers.
US: Expect increased election focus in 2H24
US continues to maintain its outperformance over World equities, underscoring our earlier constructive stance on US equities.
Key drivers of the outperformance include better-than-expected earnings growth in the recent 1Q24 corporate reporting season and supportive financial conditions. At a sector level, Information Technology and Communication Services and were amongst key drivers of overall earnings growth in the US.
For FY24E and FY25E, consensus forecasts for MSCI US index’s earnings per share (EPS) growth are for 10.3% and 14.3% respectively, higher than World equities’ EPS growth forecast at 8.1% and 12.6% respectively.
We observe investor positioning remaining in key US mega caps which have continued to deliver higher than market average earnings growth. This is unsurprising given that S&P500 index’s EPS growth excluding the “Magnificent Seven” stocks is estimated to be more muted at about -2% year-on-year (YoY).
The AI theme continues to exert a dominant influence on the US equity market this year, which has been reflected in the strong outperformance of semiconductor related stocks within the information technology sector.
While valuations of the tech sector appeared extended, we maintain a constructive outlook based on our expectations of above average market growth and the potential for peaking interest rates to provide further support.
Within Pharma, contributions from key existing products and newly launched treatments focused on obesity and oncology should remain key growth drivers.
We continue to see attractions in healthcare’s defensive-growth meris, while AI also has the potential to transform the industry, reducing costs and improving savings in the long run.
Looking into 2H24, we expect increasing investor focus on November’s election in the US, which could translate into higher volatility for any industries that could be affected or benefit from potential policy changes and provide fresh tactical opportunities for investors.
Areas on our radar - Healthcare policies, AI regulation, energy permits, trade and tax policies.
Investment implications - To pay attention to core asset allocation and diversification of portfolio holdings.
Notable Developments in Selected Sectors
Europe / UK: Europe still performing
The Stoxx Europe 600 continued its early-year momentum to hit record highs in May. DAX, CAC 40 and the UK FTSE 100 indices all achieved new highs, benefiting from a rotation into value stocks.
What happened?
Macro challenges remain a consideration for investors. Ratings agency S&P downgraded France's credit score for the first time since 2013, citing a deterioration in the country's budgetary position.
Germany has been a notable struggler with growth, skirting a recession at the start of the year. However, the prospect of interest rates cuts has been taken favourably by investors, as having more recent signs of macro stabilisation.
The European Central Bank (ECB) didn’t disappoint the market, cutting rates by 25 bps to 3.75% in June while embracing a data dependent path for future reductions. We forecast up to two further cuts this year.
Our view
Earnings season supportive. The recent earnings season was also encouraging, with market cap weighted EPS coming in ~8% ahead of consensus. A larger-than-expected percentage beat EPS estimates (59% vs. 53% 10-year average), driven by Financials, Consumer Staples, Real Estate and Consumer Discretionary.
China remains an important risk factor for revenue, given Europe derives ~8% of revenue from this market (vs. ~2% for the S&P 500) and signs of government stimulus in this market provide a positive backdrop.
European stocks still trade at low valuation levels (S&P 500 P/E of 22.1x compared with Stoxx 600 of 14.3x).
UK hits new highs and awaits an election. The UK bounced back strongly from a shallow recession, providing some relief for the ruling Conservative Party as it heads into a general election in July. GDP jumped 0.6% in Q1 2024 compared to the previous three months, the best reading since late 2021.
This has underpinned market performance, with the UK being one of the best performers globally quarter-to-date. The UK still offers value, trading on 12.0x forward P/E, with the valuation discount attracting M&A suitors.
European Market - Healthcare, Industrials, Materials (e.g., Metals, Mining & Construction Materials), Financials, Tech and REITs. In addition, domestic consumption plays also look interesting as we enter a big summer of sport in the region.
Notable Developments in Selected Sectors
