Bull Runs
The market has been strong in 2024, following on from the fantastic Christmas rally where many clients saw more gains in November and December than what they might see from an entire year under normal conditions. Whilst this is fantastic news, the prudent investor will always be weary of the market moving too far too fast, as it raises the fear of it moving backwards at the same speed. Interestingly, at present the market doesn’t look too extended. Stocks like the ‘Magnificent 7’ have done extremely well but we see little resembling ‘euphoria’ when you look to most company valuations. Even when you consider the darling of this bull run, Nvidia (up 90% in 6 months). It has caused some to say, “it’s the next Cisco”, which isn’t a good look for Nvidia. Yes, the stock performance might look similar but there is one fundamental difference - Cisco’s rise to fame was on its projected growth of a starting base of 0, whereas Nvidia generated over 12 billion dollars in earnings last quarter and looks set to beat that again this quarter. That’s tangible revenue, which has led the stock to rally accordingly. With interest rates set to fall this year, we see this as an environment in which investors are happier buying into stocks and shares, and therefore we see this goldilocks environment for markets carrying on for a little while longer.
Emerging Markets
Emerging market (EM) equities have trailed their developed counterparts, as an economic backdrop in China and higher US interest rates have somewhat soured investor sentiment. EM equities are currently cheap on a relative basis, with discounts as steep as 30%-40% compared to US equities. In large, driven by China’s low valuations. However, we expect improving EM profitability and stronger earnings growth to narrow this valuation gap. A shift in corporate culture towards greater capital efficiency is supporting profitability trends, with EM companies increasingly focused on delivering returns to shareholders. We also see less reliance on China to deliver growth for EM. Economies such as Malaysia and Vietnam have benefited from moving their supply chains away from China, whilst Taiwan has been a beneficiary from the recent technology cycle and semiconductor demand. In Latin America, Brazil and Mexico has also been a bright spot due to nearshoring trends and foreign direct investment to improve global supply chains. On the macro front, some EMs also ahead of developed markets in their interest rate easing cycle. And now with the Fed expected to cut rates in 2024 in lockstep with global disinflation, EMs should have another catalyst to outperform. As such, we are channelling this EM optimism within the TAM portfolios and believe an allocation towards EM equities should provide an additional source of alpha.
The PRI
This month, TAM became a proud signatory of the United Nations-supported Principles for Responsible Investment (PRI), who are working to achieve an economically efficient, sustainable global financial system, by encouraging adoption of the principles and collaboration on their implementation. By signing the principles, TAM can publicly demonstrate our commitment to incorporating environmental, social and governance factors into our investment decision making and ownership practices, benefitting from a global collaborative network, cutting-edge research and resources, and transparent reporting.
If you would like to speak with us about anything from this note, or to discuss our discretionary investment management services in general, please get in touch with our European manager, Tom, today: tom.worthington@tameurope.com