This article first appeared in Capital, The Edge Malaysia Weekly on August 5, 2024 - August 11, 2024

DESPITE the emergence of new political risks and the run-up in global markets in the first half of the year, Principal Asset Management is keeping its “overweight” stance on global equities for the second half of 2024 in anticipation of continued corporate earnings growth.

Among the new risks that have emerged are uncertainties in the political scene, including elections in the UK and France as well as the upcoming US elections in November, according to its chief investment officer Todd Jablonski.

Having said that, he observes that equity markets were less volatile this year than they typically are in the first and second quarters.

Jablonski also notes that the near all-time highs seen in the valuation of global equities are greatly underpinned by the continued development of artificial intelligence. “AI will have to find that ‘killer application’ to monetise its existence for these valuations to remain in place.”

Jablonski believes there will be continued upside potential in global equities, especially in the Magnificent Seven — referring to the seven most valuable US technology firms that are Apple Inc, Microsoft Corp, Amazon.com Inc, Alphabet Inc, Meta Platforms Inc, Tesla Inc and Nvidia Corp — on the back of their profit-generating ability.

“They have been the true winners in the short term. As you have seen, many US firms achieve US$3 trillion (RM13.9 trillion) valuations. These tech giants can continue to get bigger. While there have been some short-term pressures, we think these tech giants can continue to maintain high profitability and cash-flow generation,” he tells The Edge in an interview.

“The level of US interest rates remains benign for these types of firms. That gives us some optimism that US mega caps can continue to perform.”

He adds that the Magnificent Seven have achieved a return on equity (ROE) of 70%, which is six times higher than that of the MSCI All-Country World Equity Index.

Notably, in June this year, the market capitalisation of Nvidia briefly topped US$3 trillion, surpassing Apple as the world’s second most valuable stock. Bloomberg data shows that the US Standard & Poor’s 500 index is trading at a price-earnings ratio of 23.8 times, higher than the 18.25 times and 23 times seen at the end of 2022 and 2023 respectively.

Jablonski also sees signs of optimism in banking stocks. “Bank strength is looking quite good; so, banking stocks will be an interesting play in the second half of the year.”

Overall, he expects 2024 and 2025 to be the decent years for corporate earnings. “We are expecting world stocks to achieve 10% earnings growth in 2024 and a 13% expansion in 2025. That level of earnings will certainly help sustain some of the valuations that you see in the market.”

Commenting on the upcoming US election, Jablonski says the US economy will not be affected by the outcome of the election.

“In the long term, whether it’s a Republican or a Democrat in the US White House, typically, the president has little actual influence over the state of the economy. While [the president] affects matters of policy, it is typically companies in the US that set the economic pace based on economic conditions. I’m quite optimistic that the US economy can continue to thrive.

“I do not expect the US to pursue a policy that is value destructive. The world’s first and second largest economies — the US and China — are inextricably linked. It’s going to take cooperation for both to be successful. Donald Trump’s words can cause volatility in markets, but I tend to focus on policy and actions more than words,” he explains.

While the US presidential elections continue to grab headlines after US President Joe Biden withdrew from the race and endorsed Vice-President Kamala Harris to succeed him as the Democratic presidential candidate, Jablonski is keeping his eyes trained on the US Federal Reserve, which has held the federal funds rate unchanged at the current 5.25%-to-5.5% range for a year (since July 2023). He sees two Fed rate cuts by year-end.

“We expect the first cut to come in September and the second cut to arrive after the US election. We forecast an additional four cuts in 2025. So, there might be six rate cuts over the next 18 months, with a 150-basis point reduction.

“Historically, US Fed cuts have coincided with strong performance from equities and other risky assets. It’s part of the reason we are overweight on equities,” he says.

With US inflation expected to end the year at 2.8%, Jablonski says, this will give the US Fed more room to cut rates.

As at June 30 this year, Principal Asset Management had US$219 billion worth of assets under management, with equities and fixed income accounting for about 60% and 40% respectively. Investments in Asia made up 15% to 20%.

Jablonski says: “Asia is tactically interesting to us. We have deployed more risks in Asian markets. I am, in particular, very positive on the consumer sector across Asia because wealth creation is happening in the region, at perhaps a faster rate.”

He is positive on markets such as India, Taiwan and South Korea.

“We are overweight on Indian equities and optimistic about that market. India is expected to become the world’s third-largest economy by 2027, with a very young labour force. And you find that the most recent election policy in India is now supportive of business and economic development.

“We are also overweight on Taiwan and South Korea, but US large-cap stocks and India are two segments that I find very interesting,” he says.

Meanwhile, he is looking for signs of a catalyst to re-enter the Chinese market, whose returns have been lacklustre so far this year.

“Certainly, housing remains at the forefront of most investors’ concerns around China. The local governments in China have had a steady stream of revenue from selling land to developers. The real stress today is in balancing tax revenues at the federal level in China — all the way down to the state and local levels. Perhaps this is where you can see an opportunity for a bit of reforms and changes in policy.”

On the commodity front, Jablonski is overweight on precious and industrial metals, including tin, copper and gold.

“The AI boom and the demand for power lays a strong case for the fundamentals of copper. For gold, I see two forces providing additional demand for gold. First, the Chinese central bank has been accumulating a stockpile of gold and it has been purchasing gold on the open market and building it into its reserves. That consistent buying from China has sustained the upward trajectory of the gold price.”

Gold prices hit another record high of US$2,452 an ounce in mid-July, after comments from Fed officials cemented expectations of a US interest rate cut in September.

Jablonski is less optimistic, however, about the current price of oil because of the lack of the demand catalyst.

“In the short term, I do not expect a surge in demand that would really drive the price of oil higher. When the US and the global economy re-accelerate in 2025, it might be the opportune time to take a look at the price of oil.”

Last Monday (July 29), Brent crude oil slipped below US$80 a barrel for the first time since June 10 on signs of poor demand from the world’s top oil importer, China. It closed at US$80.84 a barrel on July 31, down more than 11% from over US$91 a barrel last April, and was hovering near US$81.50 at the time of writing. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.