Having made a strong start to 2024 – which saw total returns from the global equity market (as measured by the MSCI World Index) of 9.88% in sterling terms over the first quarter of the year – equities had a more muted period in the second calendar quarter. Total returns from the global equity market as a whole were 2.56% in sterling terms over the three months of April to June.
Many major economies have demonstrated economic growth during the first half of 2024 – notably the US where real GDP* increased at an annual rate of 1.4% in the first quarter and 2.8% in the second quarter of the year.**
We expect this economic growth should bode well for corporate earnings and hence for equity returns, although Markets will continue to be alert to emerging macroeconomic data, such as inflation, and commentary from central banks, responding to reflect any implications that new information may have for the path of monetary policy (e.g. changes in interest rates).
While we continue to see an improvement in the performance of areas such as banks and energy companies, much of the market returns continue to be driven by the largest US technology businesses (Nvidia, in particular). In fact, the top five contributors to performance of the S&P 500 this year (Nvidia, Alphabet, Microsoft, Meta, Amazon) account for 57% of the returns of the index and accounted for more than half of the index’s +26% return last year. In Q2, this concentration of returns was even greater, with Nvidia, Microsoft, Apple & Alphabet alone accounting for over 100% of the index return (i.e., without these the value of the index would have fallen).
Looking at sector-specific returns, only information technology and communication services outperformed the wider MSCI World Index through the second quarter, while most other sectors were broadly flat.
This divergence in performance comes amid still, we consider, reasonable expectations for earnings growth in many other areas of the market, as indicated by recent earnings expectations given by companies.
Positioning and outlook
Much has been made by market commentators regarding the contribution of the so called Magnificent 7 to overall growth in earnings. Given the size of these businesses and the potential level of growth, there is no doubt that they have made a big contribution. However, this is only half of the story. Over the last year, several areas within the market have been in a downcycle, notably commodities, but also pharmaceuticals and healthcare equipment manufacturers as they suffer the hangover following significant growth during the covid pandemic. However, we believe this masks a plethora of opportunities for growth for those investors willing to look beyond big tech and seek exposure to the wide range of secular growth opportunities available. For example, in the healthcare sector, ageing demographics and subsequent investment into research and development for new therapies will benefit those in the supply chain. We expect, companies such as Thermofisher and Danaher will likely be key beneficiaries. In medical devices, companies such as Stryker are rolling out innovative products in areas such as robotic surgery. Meanwhile, within the industrials sector, the drive for greater energy efficiency will benefit those companies whose products enable companies and asset owners to reduce their carbon footprint. These could include companies like Schneider Electric and Trane Technologies. Likewise, there remains a great opportunity for companies that provide data and analytics products to various industries, such as finance and legal, demonstrated by the attractive growth at businesses such as Relx, Experian and S&P Global.
Therefore, while AI is clearly an exciting opportunity and a number of companies in the Magnificent 7 continue to provide the opportunity for future growth, they are clearly not the only mechanisms by which investors can gain exposure to compound growth in earnings and cash flows. Indeed, the long-term beneficiaries of investment in AI may well prove to be the thousands of companies outside the technology ecosystem who can use AI to improve their efficiency, develop new products and create new consumer experiences.
The CCLA Better World Global Equity fund is focused on investing in, what we consider are, high quality companies that can grow and compound cash flows at returns on invested capital that are consistently above their cost of capital (the expense incurred by a company to fund its operations). Stocks with these characteristics tend to have the ability to grow and compound their cash flows, which should, we believe, allow them to drive better returns over the long term.
We continue to avoid and remain cautious on areas of the market that we see as low return, highly cyclical and structurally challenged. For instance, we have very little exposure to banks; we believe rates have peaked, net interest margins are under pressure and credit conditions are tightening. We’re also very selective in consumer exposure, preferring companies with strong brands such as L’Oreal.
We will continue to look for a wide range of growth opportunities, keeping our focus on quality and reasonable valuations whilst ensuring the fund is well diversified.
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*Real GDP: is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy (of a country or a place) in a given time period.
Source: MSCI, Bloomberg and HSBC as at 30/06/2024. Fund performance source: HSBC. Comparator benchmark: MSCI World Index.
Sector and individual stock returns are sourced from Bloomberg.
**Source: US Bureau of Economic Analysis.
Important information
This is a marketing communication. It does not constitute the provision of financial, investment or other professional advice. You should not make investment decisions based on the information in this document. To ensure you understand whether a fund is suitable, please read the key investor information document and prospectus. CCLA strongly recommends you seek independent professional advice prior to investing. Past performance is not a reliable indicator of future results. The value of investments and the income derived from them may fall as well as rise. Investors may not get back the amount originally invested and may lose money.
Any forward-looking statements are based upon CCLA’s current opinions, expectations and projections. Such opinions, expectations or projections may be subject to change at any time. CCLA undertakes no obligations to update or revise these. Actual results could differ materially from those anticipated.