Equities: New extremes and challenging opportunities

Key equity themes to watch in 2024

Last year was another year of disappointment for Chinese equities, especially in comparison to countries winning in the fragmentation game as supply chains are increasingly avoiding China. These countries are India, Mexico, Brazil, and Vietnam, and we expect the equity market to continue favouring these emerging equity markets over China. It’s remarkable to observe that Chinese equities have underperformed in other key emerging markets by almost 44% in USD terms since early 2018.

Across equity themes we’re overweight in the commodity sector as the super cycle is still ongoing and is driven by strong global urbanization, green transformation investments, and constrained supply. Cyber security and defence stocks are also likely to continue benefiting from the ongoing geopolitical tensions in the world. 

If the market accelerates its bets on more policy cuts in 2024, then the battered green transformation stocks across wind, solar, energy storage, EVs and hydrogen could see a short-term boost.

Underweight mega caps as new extreme is reached

Last year will, undoubtedly, go down in the history books as the year of market extremes. The so-called “the Magnificent 7” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) gained 104% for the year, as of 15 December 2023, as hype over generative AI went into hyperdrive mode. In comparison, Nasdaq 100, S&P 500 and S&P 500 Equal Weight gained 53%, 25%, and 12% respectively. The Russell 2000 Index was actually down year-to-date in late October 2023 before the market aggressively repriced central bank policy rates for 2024.

As a result, the US equity market is at, or close to being at, the most concentrated it has ever been in the past 100 years. A frightening truth lies behind this fact. The outperformance cannot continue unless this small group of US technology companies take over the entire economy and continue to outperform steep growth expectations in 2024. The high index concentration also makes the US equity market riskier as returns are increasingly driven by a narrow set of risk factors with sentiment on technology stocks being one of them. Our key idea in 2024 is to be underweight US mega caps.

Value is found in UK and European equities

In UK and European equity markets, we find the exact opposite of “the Magnificent 7” with equity market valuations at 56%, and a 28% discount on US equity markets. As we don’t subscribe to US earnings being much better than Europe in the long-term, we believe expected returns will be higher in UK and European equities. So, if sentiment changes or economic activity slows down, these two equity markets also offer a higher exposure to defensive sectors.