It’s been a good year for global equities in terms of absolute returns. Once again, the US has led the way, delivering double-digit returns. But it’s not been all plain sailing. Investors have endured bouts of volatility. Speculation around the timing and size of interest rate cuts has caused swings in sentiment. Geopolitical upheaval has played a role. Meanwhile, the much-loved Magnificent 7 tech stocks (Alphabet, Apple, etc.) have started to lag. 

Nonetheless, markets continue to push higher, buoyed, in part, by a positive corporate reporting season. The question is: where do we go from here? And what does it mean for investors?

Setting the scene 

The European Central Bank and Bank of England cut rates in July and August, respectively. At the time of writing, it was odds-on that the US Federal Reserve (Fed) would also reduce rates in September, with the debate now around the size of the cut. Inflation is under control, while economic indicators are cooling. What could this mean for equities? Slowing economic growth could potentially be bad for those value trades that did so well over the last two years, particularly those relying on higher interest rates and elevated commodity prices. Outside of the US, we could see a long-awaited rotation into quality and growth stocks. These are the types of stocks we favour. 

In politics, Kamala Harris replaced President Joe Biden on the Democrat ticket, blowing the US presidential race wide open. Most commentators have the election at 50-50. What might we expect from either candidate? A Trump victory would see tax cuts (for corporates and high earners), diluted regulations and import tariffs. These measures could be positive for US stocks but also broadly inflationary and unhelpful for sentiment towards international equities. A Harris presidency, on the other hand, would likely see a measure of policy continuation. She also intends to raise corporate taxes. The chances of a full-blown trade war would be lower. These combined could boost equities outside the US, in relative terms. 

Where might you invest?

We see divergent opportunities. From a valuation perspective, the US is expensive. This remains the case even if we strip out the Magnificent 7. At the other end of the scale, Europe, emerging markets (EM) and UK equities look cheap. A slowdown in the US could therefore see bargain-hunting investors increasingly allocate to these markets. 

Smaller companies have had a challenging couple of years. Recessionary fears, high interest rates and risk-averse traders have punished the asset class. However, rate cuts could prove a boon for small- and mid-caps (SMIDs). Data is supportive of this view. In the US, SMIDs have historically outperformed large caps over three, six and 12 months following rate cuts. We’ve observed similar performance elsewhere. Small-cap valuations are also compelling relative to large caps. We could therefore see a rebound in the asset class. 

We are also upbeat on EM income. We expect many central banks to follow the Fed’s lead and cut rates, especially given the disinflation trends seen across various parts of EMs. This, alongside structural tailwinds around the technology cycle, green transition, and near-shoring, will support EM countries and companies.

And then there’s the income component. EMs used to offer slim pickings for dividend investors. Today, however, capital markets have deepened, creating a vast, varied and attractive universe of income stocks. Indeed, around 90% of EM companies currently pay dividends. Importantly, nearly 40% of these firms pay a dividend of over 3%.   

Just what the doctor ordered

We also think thematic investing will increasingly come to the fore. For example, we see significant opportunities in healthcare. People are living longer, and demographic profiles are changing. 

At the same time, many developing countries are becoming wealthier. Higher disposable incomes mean more money can be directed into diet, exercise, health insurance and better medical coverage. 

Investment in healthcare services and systems will be crucial to meet growing consumer demand. Investment opportunities span both private and public markets. Areas to highlight include healthcare infrastructure (hospitals, cutting-edge diagnostic laboratories, retirement communities), medical health & wellness technology, and preventive/personalised medicines. 

Mining the future 

There are also numerous exciting opportunities in ‘future minerals’. They’re the mined commodities (copper, lithium, aluminium, platinum and nickel) essential for the energy transition. They go into everything from electric vehicles and batteries to solar panels and fuel cells. The investment opportunities are diverse and located at all points of the value chain. This includes miners, extraction equipment makers and service providers. It’s an exciting time for this sector. We think everything is aligning for the start of a ‘super cycle’ that could evolve into a multi-decade opportunity.  

Sustainability back in focus

Lastly, there’s sustainability. This has been much-maligned of late, due to Covid-related issues around energy security, supply chains and more. Politicians on both sides of the Atlantic have (perhaps opportunistically) pushed back against sustainability. A series of disappointing COP gatherings have also disheartened investors. 

Despite this, we think sustainability will come back into focus. In our experience, business leaders appreciate the return on investment they get from sustainability initiatives. New regulations, such as the EU’s Corporate Sustainability Reporting Directive, are compelling firms to be more transparent and accountable about sustainability. Technological developments are also making it easier and cheaper to initiate sustainability practices, such as energy efficiency and waste reduction. The public, meanwhile, remains largely on board.

Final thoughts…

As we look ahead to 2025, there are reasons to be positive about equity markets. Inflation is falling and interest rates are coming down. This should be good for earnings. US policymakers, to their credit, appear to have manufactured a ‘soft landing’ for the economy. Meanwhile, valuations outside of the US look attractive. 

Against this backdrop, we will continue to focus on high-quality companies that can potentially deliver superior earnings growth. Many of these have been out of favour in recent years. Conditions are primed for them to make a comeback.