11 Apr 2024
To deliver long-term performance, investors need to have a robust process or framework of market analysis to work through. We have always believed that, to reduce the impact of market noise, investors need to focus on fundamentals, valuation, and sentiment. By and large, economic fundamentals remain positive with inflation continuing to moderate, albeit with a few bumps in the road, but economic growth and prospects for corporate earnings are positive.
Valuations in most markets remain reasonable with two potential exceptions - the United States and India. They have positive long-term attributes suggesting some level of premium rating is justified. For the former, there is the exceptionalism of S&P500 listed companies where earnings growth has outstripped other regions over long time periods and a market, when sector adjusted, looks less expensive than at face value. The US market is more heavily weighted to sectors such as IT with stronger growth prospects and higher valuations. In the case of India, the country has a long growth runway ahead of it and prospects for much improved corporate profitability over the next decade.
Sentiment is often a useful contrarian indicator, and it can be argued that there is some cause for concern with the S&P trading significantly above its 200-day moving averages and the AAII investor sentiment data extremely strong in the US. One factor behind this could be the Citi US Economic Surprise index, a measurement of how much data beats analyst expectations, which has been in positive territory all year. Positive market momentum has been driven in part by growth surprising to the upside.
Geo-politics, as ever, is a potential wild card and as well as Russia/Ukraine the tensions with Iran in the Middle East and a potential retaliatory strike, if impacting the oil price, could make the prospect of taming inflation more difficult.
After such a good start to the year, some period of consolidation would not be a huge surprise and anything that did hit the markets’ current euphoric mood could result in a short sharp correction, but overall fundamentals appear positive for equity investors. For longer-term investors, the outlook remains reasonably positive as long as economic data points continue to be benign.
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