The rally in global equities that started in late 2022 has gathered pace this year. A brighter economic outlook and the expectation of rate cuts to come have boosted equities around the world.
On average, global equity markets are up 9 per cent this year. The US market has so far returned 14 per cent, continuing a long trend of outperforming global markets. Among developed markets, the star performer has been Japan, long the Cinderella of the global equity market.
After Japan’s stock market crash in 1990, Japanese equities declined for more than two decades. You get a sense of the deflationary pressures at work from the fact that Japanese residential land prices are less than one-third of the peak reached in 1990. But since the start of 2023, the Japanese equity market has shaken off its torpor and risen by 50 per cent, faster than the US. Reforms to Japan’s system of corporate governance, decent growth and the weakening of deflationary pressures have all helped.
In Europe, Spanish equities have outperformed, in part reflecting the resilience of the Spanish economy amid the euro area slowdown. Dutch equities have also done well, buoyed by a 38 per cent increase in the value of technology stocks (ASML, which makes machines that produce semiconductors, is now by some margin the largest company by market value on the Dutch stock exchange. ASML has a market capitalisation which is roughly twenty times as much as that of the Dutch electronic and technology company Philips). French equities have lost 7% of their value since the breakthrough of the right-wing National Rally in the European elections earlier this month and president Macron’s announcement of parliamentary elections.
Chinese equities did badly in 2023 on fears about weak growth and deflation but have risen by 9 per cent this year. The Chinese market has been boosted by better-than-expected growth and a concerted attempt by the government to support equities through buying shares and restricting the number of new companies listing. Low valuations have also tempted foreign investors back into the Chinese market. Meanwhile Indian equities, whose valuations are roughly three times Chinese levels, have continued their winning streak, rising 19 per cent this year.
The rise in global equities this year has once again been driven by the technology sector. Investors are in love with tech stocks, particularly those, such as America’s Nvidia, Taiwan’s TSMC and ASML of the Netherlands, which are involved in semiconductors and generative AI. Banking stocks, especially in Europe, have also had a good year so far. Banks’ loan losses are running at low levels while improving economic activity and the likelihood that interest rates will stay higher for longer is positive for margins.
At the opposite end of the spectrum sits commercial real estate. The sector has had a difficult few years. The pandemic, high interest rates and the shift to home working have weighed on the value of office property. Last week, the Bank of England warned of challenges for US commercial real estate borrowers who need to refinance debt.
Equity investors remain bullish. According to a recent Bank of America survey, global fund managers are cutting holdings of cash to increase their exposure to riskier assets, including equities. Investors think that the global economy is on the mend and that the equity rally has further to run.
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