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Global Stock Markets:
"Waiting for Godot", U.S. stocks ushered in a period of adjustment
In the first quarter of 2024, U.S. stocks rose sharply, with the S&P up 10.16%, the fifth time since 1950 that it rose more than 10% for two consecutive quarters, the Dow rose 5.62%, the Nasdaq rose 9.11%, the Nasdaq 100 rose 8.49%, and the Russell 2000 rose 4.81%.
In the midst of such a bullish stock market, the macroeconomic situation is quite uncertain, and if we want to use a suitable metaphor, we would like to call it a state of "waiting for Godot". "Waiting for Godot" is a masterpiece of absurd theater, in which two tramps wait for "Godot", and the plot of "Godot" not coming makes people think deeply, and why wait for this Mr. Godot who does not know his face, let alone his essence? For they were to "pray" to him, to make "endless begging" to him, to "tie themselves to Godot".
The current macroeconomic situation is quite similar, and the market is anxiously awaiting the emergence of several "godots": one is inflation. Inflation has stalled recently, and crude oil prices will usher in a seasonally strong demand phase in the second quarter, Ukraine's bombing of Russia has led to the loss of 7% of its refining capacity, and there is pressure on the supply side of crude oil, but is the rise in crude oil prices creating new pressure on inflation? The second is the Federal Reserve. Although the Fed has taken an open attitude towards a rate cut in June, given the uncertainty of the situation, we believe that the Fed's rate cut cycle will be slow, and the Fed's rate cut in June may also be a precautionary rate cut, and the market is expected to wait for the Fed to act. The third is the U.S. presidential election. The showdown between the two candidates – Biden and Trump – old rivals is expected to be a scorching one. Historical data shows that in U.S. history, the re-election rate for incumbent presidents is 67 percent, 80 percent if there is no recession in an election year, and only 44 percent if a recession comes, compared to 33 percent since World War II. And given the uncertainty of the economic situation, as well as other factors (diplomacy, immigration, etc.), the presidential election is expected to bring uncertainty to the market.
Figure 1 Wall Street institutions are debating the outlook for U.S. stocks
Data source: According to public reports, Harvest Wealth collated
Therefore, we tend to believe that US equities will usher in challenges after the sharp rally in Q1, and there will be more volatile and volatile correction periods, and market beta returns are quite limited. Even so, U.S. stocks have returned more than 13% annualized in the past decade, while the volatility is around 15%, accounting for more than 6% of global indices, and they are still one of the high-quality equity asset investment objects. We still recommend that you can do something during the market volatility, such as appropriately reducing positions as a tactical adjustment on the basis of maintaining strategic allocation, and for example, investors with light and short positions can take this opportunity to invest in US stocks.
Global Stock Markets:
Non-US markets continue to favor Japanese and Indian equities
In non-US markets, we continue to be bullish on investment opportunities in Japan and India.
In Japan, the Nikkei 225 index rose more than 20% in local currency terms in the first quarter, but we believe that even after the Bank of Japan raised interest rates for the first time, the Japanese stock market is still quite attractive and worth investing in, and its basic logic has not changed. First of all, Japan's reflation situation is good, as shown in the chart below on the left, the first round of negotiations in the spring of 2024 showed a wage increase of 5.28%, which is very close to the 5.85% increase required by the unions, which shows that companies have not bargained too much with the unions on the extent of the increase, which means that companies have more confidence in profitability, so the continuation of inflation will bring a boom cycle to Japan. As shown in the chart below on the right, international investors have continued to buy Japanese stocks since 2023, and we believe that under the leadership of well-known investors such as Warren Buffett investing in Japanese stocks, the allocation ratio of international investors in Japanese stocks will be systematically improved. Finally, other factors have also boosted Japanese stocks, such as the TOSE's policies to improve corporate management and capital efficiency, improve corporate governance and increase dividend ratios, and the new NISA reform is expected to channel funds into long-term investment in Japanese equities.
For Indian equities, year-to-date gains have been quite limited, with Indian equities trading sideways, and we believe that Indian equities are expected to break out of the current consolidation channel and have upside momentum as we approach the Indian elections (May). India's economic growth in 2024 is widely expected to remain at a high level of 6.5%-7.0%, coupled with inflation of more than 4%, India's nominal growth rate will be double-digit, which is a very favorable environment for corporate earnings. Despite the higher valuation levels, we are more inclined to believe that the scarcity of high growth will be able to absorb the relatively high valuation levels.
Figure 2 Positive factors for the Japanese stock market:
(Left chart) the first round of data of Chundou, (right chart) International investors have bought Japanese stocks since 2023
Source: Nomura Orient Securities
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