Schroders optimistic on global equities on improved earnings outlook
Positive on AI alongside China and India’s growth potential
Schroders today revealed its investment convictions for the second half of 2024, highlighting the impact of sustained high inflation on global economic growth, and the investment opportunities across asset classes and themes for investors in Asia to consider.
With global central banks diverging in their interest rate policies, a high interest-rate environment is likely to persist for longer than expected, posing challenges for investors. Whilst overall global economic growth is expected to continue for the remainder of 2024, the pace could vary in different markets. This requires investors to be more selective and adopt flexible investment allocation strategies.
Johanna Kyrklund, Group Chief Investment Officer, said: "The performance of most major economies is expected to surpass expectations in 2024 due to robust labour markets and manufacturing recovery. However, three structural trends that we have identified at Schroders and styled as our “3D-Reset” framework – demographics, deglobalisation and decarbonisation – will continue to have implications on investment in the years to come and point to a more inflationary regime in the coming decades. Global central banks will need to maintain higher interest rates to achieve their inflation targets. With the labour market in the US and elsewhere remaining tight, completing the last mile of disinflation continues to be a challenge."
Schroders is optimistic about the outlook for global equities against a backdrop of solid fundamentals, particularly improved earnings expectations. In regions such as the UK, US, Japan, and emerging markets, one-fifth of companies are expected to achieve earnings growth exceeding 20%, reflecting ongoing improvements in corporate earnings.
Schroders holds a positive outlook on gold, noting that it typically performs well after the US Federal Reserve begins a rate-cutting cycle. As an asset class, it will offer investors protection against more persistent inflation and sovereign concerns. The US dollar remains a key holding given its diversifying properties, especially against riskier positions in portfolios and positive carry.
The firm remains optimistic about the Asian investment markets in the second half of the year, supported by expectations of strong earnings growth and a favourable liquidity environment.
Keiko Kondo, Head of Multi-Asset Investments, Asia, said: "We anticipate that Asian economies will achieve robust economic growth in 2024 and 2025. An accelerating global manufacturing cycle, robust industrial production, energy transition and strengthened new-economy sectors will boost China’s economy.”
Kondo added: "US monetary policy remains a key driver for Asian markets. Looking back at historical data, peaked or steady US interest rates tend to benefit Asian stock market performance. Compared to developed markets, Asian equities remain undervalued and corporate earnings are on the rise, suggesting potential for Asian stocks to catch up.”
“Regarding the fixed income market, following defaults in the Chinese real estate sector, the proportion of real estate in the Asian credit universe has decreased, leading to a wider range of higher-quality and more diversified issuers in the market. We foresee an environment where Asian investment-grade bonds continue to provide attractive income with lower volatility than comparable bonds in developed markets in the face of future macroeconomic uncertainty. For example, India's drive to increase renewable energy continues to offer attractive opportunities to harvest favourable yields through investment in utilities-sector bonds.”
In conclusion, Kondo highlighted three major Asian investment themes for the second half of 2024: AI, with Taiwan tech stocks lagging global peers by around 20% in valuation; corporate governance, as Japan’s successful experience in implementing corporate reforms during 2023 may broaden to other Asian markets such as China and Korea; and India’s vast growth potential, which should not be underestimated."
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