Johanna Kyrklund, CIO of Schroders, reflects on the differences between the 1990s tech bubble and markets now.
The challenge currently facing equity markets is that the very concentrated performance has left things looking lopsided. Stock markets have risen to new highs and some of the largest growth companies (such as Nvidia, up 80% in the year to date after a rise of 240% in 2023) have again powered equity markets.
Understandably, there has been some concern about the direction of travel. However, a look at valuations under the surface shows that, globally, equity valuations are still quite attractive. Excluding the largest technology stocks, the S&P500 trades around 19x 2024 forecast earnings, in-line with recent history.
Other markets outside the US are trading at a significant discount to the US and below 15-year medians on most measures. While by no means cheap as a group, even the Magnificent Seven have delivered corporate earnings to support their valuations. We are still a long way from the world of the 1990s internet bubble when investors spoke about “price to clicks” in the absence of any corporate earnings.
Although I am prone to nostalgia for the 1990s, today’s conditions are different, and we do not believe that equities are expensive.
Looking at relative valuations within equity markets, we are staying neutral on mega-cap stocks, because we lack the catalysts to move underweight the Magnificent Seven and, in any case, we believe that trading those seven stocks as a block under-estimates the very different business drivers between the individual companies. The dynamics behind the growth at Amazon, Google and Microsoft are very different to Apple or Tesla. We prefer to rely on our stock-pickers to cope with the idiosyncratic risks in each case.
But we are now responding to the more attractive valuations outside the US by extending our equity exposure from the US to the rest of the world. We’ve liked Japan for some time due to its stimulative monetary policy and an ongoing cultural shift toward improved capital allocation and shareholder returns.
A global manufacturing recovery is supportive of stocks in Europe, Asia, and Emerging Markets. There is also a window where falling inflation justifies rate cuts in the US and Europe, which is helpful to valuations and many emerging economies have already started to loosen monetary policy.
Pleasingly, we have seen some broadening of market performance with 44% of stocks outperforming MSCI World All Countries compared to 34% in 2023. The environment may get more challenging as the year progresses, if central banks fail to meet their inflation targets, but for now we remain positive on equities.
Turning to bonds, ongoing resilience in US data has led to a repricing of rate expectations in the US bond market which now more closely aligns with our view of a soft landing. Valuations have improved but given that we still don’t expect an imminent recession in the US, we retain a neutral stance.
Our exposure to fixed income remains focused on generating income, rather than expecting a return to a negative correlation with equities or significant price appreciation.
We still like gold, in spite of recent price rises, because it should benefit as central banks start to ease and also offers protection if inflation proves to be sticker than expected.
Lastly, a word on political risk. Geopolitical tension is an unfortunate constant and there is a lot of talk of all the political elections this year. Geopolitical events are very difficult to position for because their timing is almost impossible to predict. The only true defence is to be diversified in your allocations by geography and asset class and, from a corporate perspective, to review the resilience of global supply chains.
The timing of elections is obviously known but I would argue that we can over-emphasize their importance. We have already seen a shift in the political consensus, towards greater fiscal intervention and protectionism which will remain in place irrespective of electoral outcomes. As mentioned in our 3D Reset, this contributes to a deterioration in the growth and inflation trade-off which means that we are very unlikely to go back to a world of zero interest rates.
It also means that we need to reconsider sovereign risk as bond investors react to more fiscal spending. This again is very different to the 1990s when a focus on fiscal rectitude structurally reduced bond market risks. Politics matter but they tend to play out over months and years rather than days.
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