Japanese equities continued their rally after the BOJ’s historic move to end its large-scale easing policies introduced during the deflationary period. We see further room for appreciation given an attractive expected earnings trajectory, ongoing corporate reforms and structural positive changes impacting the Japanese economy. Hence, we maintain our Overweight position in Japanese equities.

For US and Europe, the bulk of the equity performance so far this year, and over the past year, has been driven by multiple expansion. This suggests that activity momentum is in the process of bottoming out, supported by dovish central banks in the meantime. Ultimately, equity valuations will end up responding to earnings momentum trends, as there is a clear historical correlation between price-to-earnings (P/E) multiples and earnings revisions. As such, should earnings growth continue to hold up, current equity multiples can be defended, and we maintain our Neutral positions on US and European equities.

On the other hand, Chinese equities showed no rerating over the past year, trading at around 9x forward P/E, which is at absolute and relative lows. There may be a near-term bounce for the market given distressed valuations and skewed positioning, but more will be needed for a sustainable recovery. We are also keeping an eye on US-China tensions, which may escalate especially during a US election year.

US – Broadening of rally important for sustainability

The S&P 500 Index has continued rise over the last month, reaching new highs. This is mostly driven by the Magnificent Seven names as they continue to enjoy multiple tailwinds such as higher demand for artificial intelligence (AI) training and inference solutions, strong network effects and stellar fundamentals.

However, we see the rally broadening out from the Magnificent Seven to the rest of Tech and other sectors, especially Healthcare, Utilities and Consumer Staples. We also do not rule out the possibility of mid-to-small cap stocks benefiting given easing monetary conditions.

Encouragingly, we have observed some early signs of the above happening. In the last month, non-Tech sectors have performed well, helping to increase the breadth of this rally.

At this juncture, consensus is expecting earnings per share (EPS) growth of 9.9% year-on-year (YoY) in 2024, with much of this growth back-end loaded in 4Q24. We view this as slightly optimistic – margin expansion from greater cost control should be evident, but this could be partially offset by an anticipated mild recession in 2H24.

All considered, we continue to hold a Neutral position in US equities at this juncture, although we do not rule out the possibility that the S&P 500 Index could overshoot, especially given the dovish signals from the US Federal Reserve (Fed) of late.

Europe – Buoyed by a rising global tide

The relentless push higher in global equity markets has been accompanied by interest in Europe as a diversification play, given that

1. European equities have lagged the global rally,
2. offer undemanding valuations and
3. there are stocks in Europe which may offer an alternative to position for an upturn in China.

Like the US, Europe’s year to date performance has been confined to large-cap and quality growth, but there have also been initial signs of a broadening in recent weeks. Though we maintain a Neutral position in Europe, we see selective opportunities in discounted UK equities, and advocate investors take a diversified approach outside of Europe’s Super Seven stocks given the high concentration and crowded positions in these names.

Japan – Positioning amid BOJ’s rate hike

Given the BOJ’s statement that accommodative financial conditions will be maintained, we believe this dovish outlook is expected to provide assurance to the Japanese equity market. The Japanese Yen (JPY) depreciated against the US Dollar (USD) after the BOJ’s recent policy decision, but it is expected to rebound when the Fed cuts interest rates. Investors looking to invest in Japanese equities should consider investing on an unhedged currency basis. Currency movements will impact different sectors, with a stronger JPY being a drag on companies that are dependent on overseas demand, and a benefit to domestic-oriented companies with USD cost bases.

Japanese banks and life insurance companies are direct beneficiaries of higher interest rates, but we believe positives are already priced in. Domestic-oriented Japanese companies are expected to benefit from stronger consumer spending and eventual currency tailwinds. Longer-term ideas include companies exposed to generative AI and industrial automation.

Asia ex-Japan – Elections and results season are signposts to watch out for

The MSCI Asia ex-Japan Index continued to see a recovery for the second consecutive month in March. Gains were led by the MSCI Taiwan and MSCI Korea indices due to optimism surrounding the recovery of the global semiconductor industry following strong guidance by a major memory player. On the other hand, the drag in price performance came from Hong Kong, Philippines and India.

Looking ahead, we believe investors will focus on the 1Q24 results season, elections (e.g. India which will hold its elections from 19 April in seven phases), the potential start of rate cuts by some major central banks including the Fed and policy implementation, particularly from China.

In terms of earnings trajectory, the MSCI Asia ex-Japan Index is projected to deliver EPS growth of 20% in 2024 (based on bottom-up consensus median estimates), which we believe carries downside risks. Markets which are expected to achieve stronger earnings growth include South Korea, Taiwan and India, while slower growth is expected to come from Indonesia, Hong Kong and Singapore.

China/HK – Incremental positives, but still cautious

Much ink has been spilled over the Chinese government’s efforts to support the economy and markets, and on the equities front, the pendulum is shifting in favour of investors. In the February- March 2024 period, MSCI China Index constituents listed in A-share/HK that reported buybacks on a high-frequency basis repurchased US$4.9b/US$5.6b of shares, which translates to 3.2x/1.9x of the same period average of US$1.5b/US$2.9b over 2021-2023. This suggests that regulations calling for higher payouts to shareholders are working. However, as with the ongoing rollout of other measures and policies to support the economy and markets, time will be required for implementation and execution. We are also keeping an eye on US-China tensions which may escalate especially during a US election year, and this is already evidenced in recent developments: i) The US-China Science & Technology Agreement was extended for another six months, but future renewals will require new Congressional oversight, and ii) four bipartisan bills were introduced in March that aimed to reduce US investments in China.

Meanwhile, we continue to believe that high yielders offering defensiveness deserve a place in one’s portfolio and we are positive on structural winners of innovation, market consolidators and companies undergoing reforms to improve returns.

Global Sectors – Energy and Materials outperformed in March

We are starting to see signs that gains are broadening across sectors, with the Global Energy and Materials sectors leading the pack in the month of March. The Energy sector was supported when Brent crude breached the US$85/bbl mark after the International Energy Agency (IEA) forecasted an oil market deficit, which was a significant reversal from its earlier expectations of a substantial surplus as recent as February. While it is logical to assume an “OPEC-put” is supporting prices in the short term, upside price scenarios are also difficult to construct unless more encouraging macro data comes in.

The Materials sector was also supported by a surge in copper prices, partly due to an agreement by China’s biggest copper smelters to reduce production in the wake of a shortage of copper concentrate due to supply disruptions.

On the other hand, the Real Estate and Consumer Discretionary sectors lagged last month. For the latter, we saw generally flattish performance for the important constituents of the MSCI All-Country World Consumer Discretionary Index, but names such as Tesla and Nike were dragged by industry specific factors. Battery electric vehicle (BEV) sales momentum is slowing globally, but sales of hybrids (HEV) and plug-in hybrids (PHEV) have been accelerating. As such, Tesla, which only sells BEVs, has suffered from the negative impact on sentiment, and this can be unnerving considering its high valuation of 56x forward P/E (as of end March).

As for the Tech sector, the 4Q23 reporting season indicates that the outlook remains robust. The AI rally momentum shows little sign of abating, cloud optimisations are attenuating, while software looks to undergo a gradual but broad-based recovery. We remain constructive on Tech, despite strong outperformance since our Overweight position in December 2023. In our view, the blistering rally provides an opportunity for investors to finetune their Tech exposure.