We continue to see 2024 as a better year for earnings growth across global markets, but after remarkable gains across a number of markets over the last six months, we are relatively less excited about the outlook, especially for Japan which we have had an Overweight position on since 1 June 2023. The stellar performance of Japan equities – the MSCI Japan Index appreciated by about 31% in local currency terms since 1 June 2023 – has led to valuations that are no longer as compelling as before. Thus, with a more balanced risk-reward profile, we are downgrading Japan to Neutral.

However, we maintain our Overweight position on the overall equities asset class, due to our Overweight on Asia ex-Japan equities. This is further buttressed by our upgrade of Indian equities to an Overweight stance. Within Asia ex-Japan, which in our view is a diverse asset class, we favour Hong Kong, China, India, Indonesia, South Korea and Singapore equities, considering the compelling valuations for some and solid fundamentals for all.

We have a Neutral position on US equities and continue to see attractive opportunities in various sectors; especially a number of well-performing stocks with strong earnings profiles which are not necessarily expensive relative to growth prospects. We also maintain our Neutral position on European equities given the balanced risk-reward profile currently.

In terms of global sectors, we reiterate our preference for Information Technology, Communication Services, Consumer Staples and Healthcare.

US – Balancing cross-currents

Corporate fundamentals in the US remain largely stable, and we remain constructive on the earnings outlook ahead. In our view, FY2024 and FY2025 earnings per share (EPS) growth will likely come in even at about 10% year-on-year (YoY) and about 9% YoY, respectively. These should be achievable on the back of tailwinds to nominal earnings from marginally higher inflation as well as operating leverage, regardless of November’s election outcome.

In particular, the US tech complex could continue to outperform. Cloud spending is likely to remain robust while elevated artificial intelligence (AI) CAPEX levels could be a continued tailwind for semiconductor names. The sustainability of equity gains for tech remains important, given its heavy sector weighting in the S&P 500 Index.

However, we recognise that valuations are elevated relative to historical levels, and we would be more comfortable adding risk should we see a more material pullback in equities. This could be possible as the market navigates the recent set of softer-than-expected consumption datapoints. We do not rule out the possibility that this air pocket could be a short window of opportunity, as weakness in the economy would likely spur the Federal Reserve (Fed) to start cutting rates from as early as September 2024.

At this juncture, we maintain our Neutral position on US equities.

Europe – Heightened political risks at home and geopolitical risks beyond

The political landscape in Europe has shifted noticeably to the right, which is important for investors, as political risks are critical for European equity performance. Historically, European equity market valuations have tracked economic policy uncertainty, and studies have shown that European equities have also become more sensitive to rising economic policy uncertainty over time.

At the same time, broader geopolitical risks also remain elevated as the EU recently announced additional tariffs on Chinese electric vehicles which could prompt retaliation from Beijing. The US election, and prospects of a Trump presidency (who is in favour of more tariffs), also remain in the horizon. In comparison, regions such as the US provide relatively more defensive geo-economic exposure. That said, European earnings are gradually recovering, underpinned by measured improvements in the macroeconomic picture. We maintain our Neutral position on European equities.

Japan – Downgrading our position in Japan equities to Neutral

We are downgrading our Overweight position in Japan equities to Neutral, as we believe the current risk-reward profile of the market is balanced.

Earnings growth in FY2025 (Japanese fiscal year ending in March 2025) is expected to moderate after a solid showing in FY2024. We also note that the positive consensus earnings revision momentum has waned in recent weeks, and this could be driven in part by the disappointing forward earnings guidance given by several companies during their full-year results.

On the macroeconomic front, there are also uncertainties over the Bank of Japan’s (BOJ’s) monetary policy and the current weakness in the Yen could be a headwind to real purchasing power of consumers.

On the other hand, ongoing corporate governance reforms are expected to be positive share price drivers, in our view.

Asia ex-Japan – Upgraded to Overweight

We are maintaining our Overweight position on Asia ex-Japan equities. Within the region, we are upgrading our position in India to Overweight from Neutral. Notwithstanding the surprising election results in June, we believe the fact that there was no major shuffling in key cabinet positions in the government provides some reassurance on the continuity of fiscal policies and helps to lift the overhang of the election results to a certain extent.

We recognise that valuations of the MSCI India Index are not cheap, but the economic environment in India remains solid with robust GDP growth and moderating inflation. Furthermore, EPS growth is projected to increase by around the mid-teen level in 2024 and 2025, while the upward earnings revision momentum by the street has crept up.

We had underestimated the strength of the domestic investor market (both institutional and retail), which has provided robust fund flows and offset the outflows from foreign institutional investors (FII) year-to-date (YTD). This trend from domestic investors is likely to continue. Given signs that FII flows have increased again post-elections, this could provide further support to Indian equities.

China/HK – Gauging policy effectiveness

The Hang Seng Index (HSI) and MSCI China Index have outperformed the CSI 300 Index in 1H2024. Going into 3Q2024, all eyes will be on certain high-level policy events like the Third Plenum and the July Politburo meeting. At the macro front, we look for signs of consumer sentiment revival and improvement in real estate transactions. We expect earnings growth and increasing focus on shareholders’ return to lend support to market performance. Earnings momentum for MSCI China has turned positive since the end of May.

At the sector level, we maintain our preference for Communication Services, IT and some parts of Consumer Discretionary (mainly internet and platforms). We are turning less cautious on Financials amid decreased net interest margin concerns. However, we turn more cautious on Consumer Staples on the back of margin pressures. We advocate a barbell strategy focusing on quality dividend yields and earnings growth delivery, including AI plays and market leaders.

Key risks would include the trajectory of the US Dollar versus the Chinese Renminbi with the Chinese currency having depreciated by 1.7% against the US Dollar in 1H2024 and geopolitical tensions as we head into the US presidential election.

Global Sectors – Tech was a top performer in 1H2024

Judging by the frequent headlines that one reads on technology related stocks, it would probably not be surprising that both the Information Technology and Communication Services sectors were the top performers in 1H2024. What is worth noting, however, is both sectors led the market by a wide margin – their gains were 25% and 22% YTD respectively, while the third best performing sector – Financials –delivered only about 9%.

Optimistic about Tech’s prospects

Despite the significant outperformance in 1H2024, we remain constructive on Tech in 2H2024. Demand for cloud services should remain robust, as enterprises continue to migrate workloads from on-prem to the cloud while generative AI (GenAI) monetisation is gradually growing. Elevated CAPEX levels, especially from hyperscalers, are also positive for the broader semiconductor complex. While consumer trends look mixed, we believe the advertising market should remain broadly resilient, especially in the digital space. E-commerce platforms are also likely to see an increase in market share especially with the grocery segment as a key growth area. The software subsector could still see some softness in investor sentiment, but we believe opportunities are still available especially as it relates to companies that offer more mission-critical applications.

Favour Consumer Staples and Healthcare

Looking ahead into 2H2024, we also favour Consumer Staples and Healthcare which lend defensiveness to one’s overall portfolio. Elevated interest rates have resulted in “downtrading” by consumers, but essentials will continue to be required under such an environment. Along with attractive valuations, we see opportunities in the Consumer Staples space. In Healthcare, we prefer the healthcare equipment and services segment, and are more cautious on the large drug makers which are losing patent protection on a significant portion of their sales by 2030.