C WorldWide Global Equity Outlook

According to Harbor’s subadvisor C WorldWide, the first half of the 2020s has already proven to be turbulent with a number of transitions and unexpected factors impacting markets. In this outlook, they discuss the environment ahead, including the improving conditions in China, the favorable conditions for stable growth, and the impact of AI on the stock market, among others. C WorldWide’s Investment Report for the third quarter of 2024 included the following outlook that touched on these themes and more.

As we approach halfway through the decade of the 2020s, “rocky” seems like a suitable term when reflecting on the past five years. It has been a turbulent period with many crosscurrents and unprecedented events.

Looking back, we have experienced:

• A transition from a unipolar to a multipolar world. With China’s global aspirations and the increased domestic focus in the US, the US is gradually losing its position as the dominant global superpower.

• Geopolitical upheaval and two major ongoing wars in the Western world.

• A global Covid-19 pandemic causing a historical global lockdown.

• A climate crisis with trillions of dollars needed for investments in an urgent energy transition that is struggling due to the high costs of new and greener technologies.

• An end to central banks’ zero-interest-rate policy.

• A historically swift monetary tightening, especially in the US, as a reaction to the inflation scare. The tightening changed the investment environment from a prolonged period of real interest rates oscillating around 0% to 10Y real rates trading above 2%. Higher real interest rates typically act as a valuation drag on long-duration assets like equities.

“With this foresight, only investors with a very optimistic mindset would – at the start of the 2020s – have predicted rock-solid equity market returns for the first half of the decade.”

Figure 1

Returns of the MSCI ACWI vs. MSCI ACWI Equal Weighted

Source: Bloomberg, September 2024 (10-year monthly data). Performance data shown represents past performance and is no guarantee of future results. The MSCI ACWI (blue line) is market-capitalization weighted and the MSCI ACWI Equal Weighted (orange line) is the equal-weighted version of the index.

With this foresight, only investors with a very optimistic mindset would – at the start of the 2020s – have predicted rock-solid equity market returns for the first half of the decade. In the following table, we show the stock market calendar returns for the MSCI AC World Index, with 4 out of 5 years exhibiting positive returns.

Table 1

Positive returns in 4 out of 5 calendar year

Source: MSCI, October 2024.

However, as we have written before, it has been a market of two tales – with the US market outperforming Europe and Asia, and technology-driven by AI outperforming significantly. It has been a market dominated by the few, as illustrated in Figure 1, which shows the equal-weighted market index underperforming the normal market capitalization-weighted index by a wide margin.

Better environment ahead

Looking ahead, it is hard to imagine a worse environment for equities, perhaps barring a severe and deep recession in the US. This is a scenario we don’t expect, although we have been worried about the well-known lags in the transmission of monetary policy into the real economy. However, with the yield curve again turning positive (spread between 2Y and 10Y T-bills), rates and, importantly mortgage rates coming down, the supportive wealth effects of the strong equity market and a continued high level of employment with decent growth in real disposable income, the all-important US consumer seems to be in position to avoid a recession.

One caveat, though, the valuation of equities has risen over the past five years, even in an environment of rising interest rates. Figure 2 shows the valuation of the global stock market, which has risen from a P/E of approximately 19x to 21x measured on 12-month trailing earnings. However, looking forward, the valuation on 12-month forward estimates is more moderate at approximately 18x.

Given the outlook of looser monetary policy globally, valuation levels shouldn’t be an immediate concern with the expectation of long-term growth in corporate earnings.

Figure 2

Valuation of the global stock market (MSCI AC World)

Source: MSCI, October 2024

Revival of China

Chinese equities staged a remarkable rally in the last week of Q3 as the Chinese authorities rolled out a range of measures to support the consumer, property and equity markets. Chinese equities have been dramatically out of favor, with some investors even labelling the market as non-investable. This made the market ripe for a strong rebound upon positive news. The announced package won’t solve China’s depressed property market and sluggish consumer confidence right away, but it does mean that China is set to adopt a more reflationary policy stance.

The comeback of stable growth

Stable growth companies have lagged the market significantly since 2020, with the MSCI Minimum Volatility Index returning just shy of a 6% compounded annual return. These companies generally have delivered steady earnings growth, but rising interest rates have depressed valuation. At the start of 2020, the stable growth companies (measured by the MSCI Minimum Volatility Index) were trading at a P/E premium to the MSCI AC World Index of 18%. Today, they are trading at an 18% discount. As growth becomes scarcer in a slower growth environment, we believe stable growth becomes more valuable and lower rates should become a tailwind to valuation.

Strong themes

We are convinced that AI will change and improve the world with strong growth, especially around AI infrastructure and semiconductor equipment for chip production. Also, investments in the energy transition are a necessity and supply chain repatriation will continue driving the need for advanced manufacturing, in our view. We think stocks within these themes should continue to benefit from long-term structural growth.

“At the start of 2020, the stable growth companies (measured by the MSCI Minimum Volatility Index) were trading at a P/E premium to the MSCI AC World Index of 18%. Today, they are trading at an 18% discount.”

“From a portfolio perspective, few investments in our global strategies have direct exposure to the outcome of the US election.”

Upcoming US election

Much media focus is on the upcoming US election, with polls adding to the drama with a prediction of an extremely tight election. Furthermore, the choice of the American people sets the stage for two very different directions, with domestic policies split on immigration and taxes, while foreign policy diverts on the US’s role as a global superpower, tariffs, commitment to the green agenda, and the handling of urgent geopolitical issues, including the war in Ukraine.

“Stay calm – stay invested”

In conclusion, we think the overall environment for equities looking into the second half of the 2020s will not be more turbulent than the first half of the decade. Furthermore, the headwind of tighter monetary policy is reversing. Although we may not get a repeat of the above market returns, a solid outlook is nevertheless expected. Higher interest rates have pressured quality and stable growth companies over the past couple of years, but this trend could be ending. With a constructive long-term equity market outlook, we revert to our long-standing investment mindset and approach which is to “stay calm – stay invested.”

Important Information

The views expressed herein are those of C WorldWide at the time the comments were made. These views are subject to change at any time based upon market or other conditions, and the author/s disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

Performance data shown represents past performance and is no guarantee of future results.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. At times, a growth investing style may be out of favor with investors which could cause growth securities to underperform value or other equity securities.

References to specific company securities are for illustration only and should not be construed as an offer or solicitation from Harbor Capital to buy or sell any securities.

Indices listed are unmanaged, and unless otherwise noted, do not reflect fees and expenses and are not available for direct investment.

The price-to-earnings (P/E) ratio is the proportion of a company's share price to its earnings per share.

Treasury bills (or T-bills) are a short-term debt obligation backed by the U.S. Department of the Treasury with a one-year maturity or less.

The MSCI ACWI is a stock index that tracks nearly 3,000 stocks in 47 developed and emerging market countries.

The MSCI ACWI Equal Weighted Index represents an alternative weighting scheme to its market cap weighted parent index, MSCI ACWI. The index includes the same constituents as its parent (large and mid cap securities from 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries*).

The MSCI Minimum Volatility (USD) Index aims to reflect the performance characteristics of a minimum variance strategy applied to large and mid cap equities across Developed Markets (DM) and Emerging Markets (EM) countries. The index is calculated by optimizing the MSCI ACWI Index, its parent index, in USD for the lowest absolute risk (within a given set of constraints).

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